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Engineering Project Management

Engineering Project Management

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Published by Hariprasad Rajanna
Engineering PMT
Engineering PMT

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Published by: Hariprasad Rajanna on May 07, 2013
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  • 1.1 The function of project management
  • Project Appraisal and Risk Management
  • 3.4 Project evaluation
  • 3.5 Engineering risk
  • 3.6 Risk management
  • 3.7 Risk and uncertainty management
  • Project Management and Quality
  • 4.1 Definitions
  • 4.2 Quality systems
  • 4.3 Implementation
  • 4.4 Quality-related costs
  • 4.5 Quality circles
  • 4.6 Quality plans
  • 4.7 Total quality management (TQM)
  • 4.8 Business process re-engineering (BPR) and TQM
  • Environmental Management
  • 5.1 Environmental impact
  • 5.2 Environmental impact assessment (EIA)
  • 5.3 Screening
  • 5.4 Environmental legislation
  • 5.5 Scoping
  • 5.6 Base-line study
  • 5.7 Impact prediction
  • 5.8 Environmental impact statement
  • 5.9 Presenting EIA information
  • 5.10 Monitoring and auditing of environmental impacts
  • 5.11 Environmental economics
  • 5.12 Environmental management
  • Project Finance
  • 6.1 Funding for projects
  • 6.2 Sources of finance
  • 6.3 Project finance
  • 6.4 Financial instruments
  • 6.5 Financial engineering
  • 6.6 Debt financing contract
  • 6.7 Types of loans
  • 6.8 Appraisal and validity of financing projects
  • 6.9 Risks
  • Cost Estimating in Contracts and Projects
  • 7.1 Cost estimating
  • 7.2 Cost and price
  • 7.3 Importance of the early estimates
  • 7.4 Estimating techniques
  • Estimating technique
  • 7.5 Suitability of estimating techniques to project stages
  • 7.6 Estimating for process plants
  • 7.7 Information technology in estimating
  • 7.8 Realism of estimates
  • Project Stakeholders
  • 8.1 Stakeholders
  • 8.2 Primary project stakeholders
  • 8.3 Secondary project stakeholders
  • 8.4 Understanding the interests and influences
  • 8.5 Stakeholder management
  • 8.6 Stakeholders and communication
  • 8.7 Summary
  • Planning
  • 9.1 Planning
  • 9.2 Programming
  • 9.3 Network analysis
  • 9.4 Updating the network
  • 9.5 Resource scheduling
  • 9.6 Planning with uncertainty
  • 9.7 Software and modelling
  • Project Control Using Earned Value Techniques
  • 10.1 Project control
  • 10.2 Earned value definitions
  • 10.3 The theory and development of earned value analysis
  • 10.4 Relationship of project functions and earned value
  • 10.5 Value of work done control
  • 10.6 Earned value analysis techniques
  • 10.7 Application of EVA
  • 10.8 Examples of EVA
  • 10.9 Summary
  • Contract Strategy and the Contractor Selection Process
  • 11.1 Context
  • 11.2 Factors affecting strategy
  • 11.3 Contractual considerations
  • 11.4 Contractor choice
  • 11.5 Project objectives
  • 11.6 Contract selection
  • 11.7 Project organisation
  • 11.8 Risk allocation
  • 11.9 Terms of payment
  • 11.10 Model or standard conditions of contract
  • 11.11 Sub-contracts
  • Contract Policy and Documents
  • 12.1 Tendering procedures
  • 12.2 Contracting policy
  • 12.3 Contract planning
  • 12.4 Contractor pre-qualification
  • 12.5 Contract documents
  • 12.6 Tender review
  • 12.7 Tender evaluation
  • 12.8 Typical promoter procedure
  • Project Organisation Design/ Structure
  • 13.1 Organisations
  • 13.2 Building blocks of organisations
  • 13.3 Organisation types
  • 13.4 Internal and external projects
  • 13.5 The human side of structure
  • 13.6 Structure in collaborative relationships
  • 13.7 Structure in the international context
  • 13.8 Summary
  • Design Management
  • 14.1 Role of designs
  • 14.2 Understanding design
  • 14.3 What design has to do
  • 14.4 The role of design management
  • 14.5 Managing the project triple constraints
  • 14.6 Design liability
  • 14.7 Briefing
  • 14.8 Interface control
  • 14.9 Design for manufacturing
  • Supply Chain Management
  • 15.1 Background
  • 15.2 Perspectives on terminology
  • 15.3 Supply chain strategy
  • 15.4 The nature of the organisation
  • 15.5 World-class organisation in manufacturing
  • 15.6 The project value chain
  • 15.7 Procurement and the project value chain
  • 15.8 Prime contracting
  • 15.9 The operation of future construction supply chains
  • 15.10 Summary
  • Team-Based Supply Chains and Partnering
  • 16.1 Background
  • 16.2 Team working
  • 16.3 Partnering
  • 16.4 Establishing the relationship
  • 16.5 Making the relationship work
  • 16.6 Benefits of partnering
  • 16.7 Constraints to partnering
  • 16.8 Summary
  • Private Finance Initiative and Public±Private Partnerships
  • 17.1 Concession contracts
  • 17.2 Definition of concession projects
  • 17.3 Organisational and contractual structure
  • 17.4 Concession agreements
  • 17.5 Procurement of concession project strategies
  • 17.6 Concession periods
  • 17.7 Existing facilities
  • 17.8 Classification of concession projects
  • 17.9 Projects suitable for concession strategies
  • 17.10 Risks fundamental to concession projects
  • 17.11 Concession package structure
  • 17.12 Advantages and disadvantages of concession projects
  • 17.13 The origins of PFI
  • 17.14 The arguments for privately financed public services
  • 17.15 PFI in the UK
  • 17.16 Bidding and competition
  • 17.17 Output specification
  • 17.18 Financing public±private partnerships
  • Aspects of Implementing Industrial Projects
  • 18.1 Multi-disciplinary projects
  • 18.2 Industrial projects
  • 18.3 Large engineering projects
  • 18.4 UK off-shore projects
  • 18.5 Legal systems in the EU countries
  • 18.6 Innovation
  • Project Management in Developing Countries
  • 19.1 What makes developing countries different?
  • 19.2 The construction industry in developing countries
  • 19.3 Finance and funding
  • 19.4 Appropriate technology
  • 19.5 Labour-intensive construction
  • 19.6 Community participation
  • 19.7 Technology transfer
  • 19.8 Corruption
  • 19.9 Summary
  • The Future for Engineering Project Management
  • 20.1 The role of the parties
  • 20.2 Guidelines for project management
  • 20.3 Project management ± the way ahead
  • Suggested Answers to Exercises in Chapter 9
  • Index


Second Edition

Edited by

Nigel J. Smith
Professor of Construction Project Management University of Leeds

# 2002 by Blackwell Science Ltd, a Blackwell Publishing Company Editorial Offices: Osney Mead, Oxford OX2 0EL, UK Tel: +44 (0)1865 206206 Blackwell Science, Inc., 350 Main Street, Malden, MA 02148-5018, USA Tel: +1 781 388 8250 Iowa State Press, a Blackwell Publishing Company, 2121 State Avenue, Ames, Iowa 50014-8300, USA Tel: +1 515 292 0140 Blackwell Publishing Asia Pty Ltd, 550 Swanston Street, Carlton South, Melbourne, Victoria 3053, Australia Tel: +61 (0)3 9347 0300 Blackwell Wissenschafts Verlag, Kurfu È rstendamm 57, 10707 Berlin, Germany Tel: +49 (0)30 32 79 060 The right of the Author to be identified as the Author of this Work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. First edition published 1995 by Blackwell Science Ltd Reprinted 1996, 1998

Second edition published 2002 by Blackwell Science Ltd Library of Congress Cataloging-in-Publication Data Engineering project management/edited by Nigel J. Smith.Ð2nd ed. p. cm. Includes bibliographical references and index. ISBN 0-632-05737-8 (alk. paper) 1. EngineeringÐManagement. 2. Construction industryÐManagement. I. Smith, Nigel J. TA190 .E547 2002 658.4'04Ðdc21 ISBN-0-632-05737-8 A catalogue record for this title is available from the British Library Set in 10/13pt Times by DP Photosetting, Aylesbury, Bucks Printed and bound in Great Britain by TJ International, Padstow, Cornwall For further information on Blackwell Science, visit our website www.blackwell-science.com



Preface List of Contributors Acknowledgements List of Abbreviations 1 Projects and Project Management Denise Bower 1.1 The function of project management 1.2 Projects 1.3 Project management 1.4 Project initiation 1.5 Projects risks 1.6 Project objectives 1.7 Project success Value Management Tony Merna 2.1 Introduction 2.2 Definitions 2.3 Why and when to apply VM 2.4 How to apply VM 2.5 Reviews 2.6 Procedures and techniques 2.7 Benefits of value management 2.8 Summary Project Appraisal and Risk Management Nigel Smith 3.1 Initiation 3.2 Sanction 3.3 Project appraisal and selection

xi xiii xv xvi 1 1 2 3 5 7 9 11 16 16 16 20 22 23 27 28 28 30 30 32 33




vi Contents 3.4 3.5 3.6 3.7 4 Project evaluation Engineering risk Risk management Risk and uncertainty management 37 39 39 43 44 44 46 49 50 52 53 53 55 58 58 60 62 63 65 66 67 68 69 73 75 80 86 86 87 88 89 91 92 93 98 100

Project Management and Quality Tony Merna 4.1 Definitions 4.2 Quality systems 4.3 Implementation 4.4 Quality-related costs 4.5 Quality circles 4.6 Quality plans 4.7 Total quality management (TQM) 4.8 Business process re-engineering (BPR) and TQM Environmental Management Ian Vickridge 5.1 Environmental impact 5.2 Environmental impact assessment (EIA) 5.3 Screening 5.4 Environmental legislation 5.5 Scoping 5.6 Base-line study 5.7 Impact prediction 5.8 Environmental impact statement 5.9 Presenting EIA information 5.10 Monitoring and auditing of environmental impacts 5.11 Environmental economics 5.12 Environmental management Project Finance Tony Merna 6.1 Funding for projects 6.2 Sources of finance 6.3 Project finance 6.4 Financial instruments 6.5 Financial engineering 6.6 Debt financing contract 6.7 Types of loans 6.8 Appraisal and validity of financing projects 6.9 Risks



Contents 7 Cost Estimating in Contracts and Projects Nigel Smith 7.1 Cost estimating 7.2 Cost and price 7.3 Importance of the early estimates 7.4 Estimating techniques 7.5 Suitability of estimating techniques to project stages 7.6 Estimating for process plants 7.7 Information technology in estimating 7.8 Realism of estimates Project Stakeholders Kris Moodley 8.1 Stakeholders 8.2 Primary project stakeholders 8.3 Secondary project stakeholders 8.4 Understanding the interests and influences 8.5 Stakeholder management 8.6 Stakeholders and communication 8.7 Summary Planning Nigel Smith 9.1 Planning 9.2 Programming 9.3 Network analysis 9.4 Updating the network 9.5 Resource scheduling 9.6 Planning with uncertainty 9.7 Software and modelling Project Control Using Earned Value Techniques Denise Bower 10.1 Project control 10.2 Earned value definitions 10.3 The theory and development of earned value analysis 10.4 Relationship of project functions and earned value 10.5 Value of work done control 10.6 Earned value analysis techniques 10.7 Application of EVA 10.8 Examples of EVA 10.9 Summary

vii 105 105 107 109 112 119 121 123 124 127 127 127 128 129 131 134 135 137 137 138 139 145 146 146 147 156 156 157 159 161 163 164 166 167 172





Contents 11 Contract Strategy and the Contractor Selection Process David Wright 11.1 Context 11.2 Factors affecting strategy 11.3 Contractual considerations 11.4 Contractor choice 11.5 Project objectives 11.6 Contract selection 11.7 Project organisation 11.8 Risk allocation 11.9 Terms of payment 11.10 Model or standard conditions of contract 11.11 Sub-contracts Contract Policy and Documents David Wright 12.1 Tendering procedures 12.2 Contracting policy 12.3 Contract planning 12.4 Contractor pre-qualification 12.5 Contract documents 12.6 Tender review 12.7 Tender evaluation 12.8 Typical promoter procedure Project Organisation Design/Structure Kris Moodley 13.1 Organisations 13.2 Building blocks of organisations 13.3 Organisation types 13.4 Internal and external projects 13.5 The human side of structure 13.6 Structure of collaborative relationships 13.7 Structure in the international context 13.8 Summary Design Management Peter Harpum 14.1 Role of designs 14.2 Understanding design 14.3 What design has to do 14.4 The role of design management 174 174 175 177 179 180 182 186 193 194 201 204 206 206 207 208 211 212 213 214 215 222 222 223 225 231 232 233 234 236 238 238 239 241 243




10 Summary Team-Based Supply Chains and Partnering Denise Bower 16.1 Concession contracts 17.Contents 14.5 14.3 Partnering 16.8 Summary Private Finance Initiative and Public±Private Partnerships Tony Merna 17.1 Background 16.7 14.6 Benefits of partnering 16.8 Prime contracting 15.5 Making the relationship work 16.7 Existing facilities 17.5 Procurement of concession project strategies 17.8 14.2 Perspectives on terminology 15.1 Background 15.10 Risks fundamental to concession projects 16 17 .6 The project value chain 15.2 Definition of concession projects 17.2 Team working 16.5 World-class organisation in manufacturing 15.6 14.4 Concession agreements 17.6 Concession periods 17.7 Procurement and the project value chain 15.9 Projects suitable for concession strategies 17.4 Establishing the relationship 16.4 The nature of the organisation 15.8 Classification of concession projects 17.3 Organisational and contractual structure 17.7 Constraints to partnering 16.3 Supply chain strategy 15.9 The operation of future construction supply chains 15.9 15 Managing the project triple constraints Design liability Briefing Interface control Design for manufacturing ix 247 255 257 259 261 264 264 265 266 269 270 275 277 281 285 287 290 290 291 292 298 300 300 303 305 307 307 308 309 311 311 313 314 315 317 317 Supply Chain Management Steven Male 15.

14 17.6 Community participation 19.16 17.5 Labour-intensive construction 19.6 Innovation Project Management in Developing Countries Ian Vickridge 19.11 17.4 Appropriate technology 19.3 Finance and funding 19.4 UK off-shore projects 18.18 18 Concession package structure Advantages and disadvantages of concession projects The origins of PFI The arguments for privately financed public services PFI in the UK Bidding and competition Output specification Financing public±private partnerships 319 321 323 323 325 326 328 329 333 333 335 336 337 338 339 341 341 345 346 347 349 351 352 353 355 357 358 359 362 364 372 Aspects of Implementing Industrial Projects Nigel Smith 18.1 The role of the parties 20.15 17.2 Guidelines for project management 20.8 Corruption 19.x Contents 17.13 17.2 Industrial projects 18.3 Project management ± the way ahead 19 20 Suggested Answers to Exercises in Chapter 9 Index .7 Technology transfer 19.3 Large engineering projects 18.1 Multi-disciplinary projects 18.1 What makes developing countries different? 19.2 The construction industry in developing countries 19.12 17.9 Summary The Future for Engineering Project Management Nigel Smith 20.17 17.5 Legal systems in the EU countries 18.

The original information on risk management is updated and enhanced. The improvements in this edition have been driven by changes in the practice of project management. Many organisations in the engineering. and by the helpful comments made by book reviewers and readers since 1995. whereas others have a more strategic. business. Changes in the management of major projects have resulted in more joint ventures. project partnering. has been published. Report of the Committee of Inquiry into the Engineering Profession. Since the publication of the first edition of this book in 1995. a number of significant developments have taken place. BS6079. and has drafted a standard contract for employing project managers. 1980). A British Standard for Project Management. managerial and multi-disciplinary function. The new xi .Preface In many sectors of industry the significance of good project management in delivering projects in accordance with predetermined objectives has been established. HMSO. Some have a very narrow brief and a precise role. There has also been a marked increase in the teaching and delivery of university programmes and continuing professional development (CPD) courses in project management. The principle of uncertainty management is recognised by a new chapter on value management to balance the effective management of adverse risk and opportunity. Industrialists and engineering institutions have called for the inclusion of a significant proportion of project management in higher-level degrees. process and other sectors are appointing project managers. Chairman Sir Montague Finniston. special project vehicles and other forms of collaborative working. something realised by Finniston in his review of the future of engineering in 1980 (Engineering our Future. and the UK-based Association for Project Management has produced a fundamental guide to processes and practice entitled Body of Knowledge. This second edition builds upon the success of the first edition in providing a clear picture of the aims of project management based upon best practice. finance.

Newly appointed project managers and students of project management at the MEng. and on effective project partnering. in the UK and overseas. Smith . particularly in relation to multi-disciplinary engineering projects. Nigel J. large and small.xii Preface edition includes new chapters on supply and value chain management. The book is not aimed at any particular sector of engineering. MBA and MSc level will find the enhanced text and references beneficial. and relates to the management of any major technical project. The book is concerned with the practice and theory of project management.

supply chain management. content. His academic research interests include risk management and procurement of projects using private finance. University of Leeds. FICE. process engineering and manufacturing. After graduating from the University of Birmingham he has spent fifteen years in the industry working mainly on transportation infrastructure projects. and delivery of a number of project management courses at Masters level and continues to work as a visiting lecturer at UMIST. He has contributed to the design. School of Civil Engineering. His research and teaching interests include strategic management in construction. He has carried out a number of research projects with international engineering and construction organisations. concentrating in particular on the front-end of the project lifecycle. is a Lecturer in Project Management in the School of Civil Engineering at the University of Leeds. shipping and construction industries. He has published fifteen books and numerous refereed papers. and is working on his doctoral thesis on design management theory. BEng. MASCE. Smith. University of Leeds. Denise Bower. She was a member of Latham Working Group 12 and has an extensive record of consultancy work with clients in construction. is Professor of Construction Project Management in the School of Civil Engineering. She was formerly the Shell Lecturer in Project Management at UMIST. MAPM. after ten years managing major projects in the oil. PhD. He is currently Dean of the Faculty of Engineering. Peter holds a Masters Degree in Project Management. BSc. Peter Harpum now works as a project management consultant advising blue chip clients in various industrial sectors. holds the Balfour Beatty Chair in Building Engineering and Construction Management.List of Contributors Editor: Professor Nigel J. CEng. MSc. Professor Steven Male. value xiii . Peter Harpum. She is a leading member of Engineering Management Partnership which offers Diploma and Masters Degree level qualifications to engineers of all disciplines.

his initial employment was with Farrow Laing in Southern Africa. and Saudi Arabia as well as the UK. MICE. Singapore. MPhil.xiv List of Contributors management and value engineering. MCIWEM. He is a visiting Professor in the Department of Civil Engineering. He is now a consultant on matters of contract and commercial law. Hong Kong. He has over thirty years experience in the construction industry gained in Canada. DTI. . he has been involved at the design. ACIArb. left Oxford with a degree in Jurisprudence and spent 30 years in industry. the defence industry and the chemical engineering and process industry. construction. the electronic industry. He moved to Leeds four years later to pursue research interests in strategic business relationships between organisations and their projects. MA. construction consultancy firms. A chartered engineer by profession. MSc. runs his own civil engineering consultancy and is also a Visiting Senior Lecturer in Civil Engineering at UMIST. CEng. He has led research projects under the EPSRC IMI programme `Construction as a Manufacturing Process'. He works closely with industry and has undertaken a range of research. University of Leeds. MAPM. Tony Merna. operation and financing stages of many projects procured in the UK and overseas. He was Commercial Manager of Polibur Engineering Ltd and in the mechanical engineering sector was European Legal Manager to the Mather & Platt Group. MIQA. CEng. blue chip and government clients. MSc. PhD. University of Chile. and. He has contributed to many publications and is co-author of the book Corporate Communications in Construction. BSc. within the European Union 4th and 5th Frameworks. AIArb. before his first academic appointment at Heriot Watt University. He gained experience in the automotive industry. is a Lecturer in Construction Management in the School of Civil Engineering. China. environmental management and project management. CIChemE. training and consultancy studies with construction corporations. David is also a Visiting Lecturer at UMIST and a Visiting Fellow in European Business Law at Cranfield University. David Wright. He is the Executive Secretary of the UK Society for Trenchless Technology and a reviewer of candidates for Membership of the Institution of Civil Engineers. Ian Vickridge. BA. Kris Moodley. After graduating from Natal University. MICE. He has published extensively on a variety of topics related to construction. BSc(Eng). with the DETR. is the senior partner of the Oriel Group Practice and is also a Lecturer in the Department of Civil and Construction Engineering at UMIST.

I would also like to thank again the contributors to the first edition. Nevertheless. also Dr Kareem Yusuf of IBM for his new contribution in software and modelling in Chapter 9. I am also grateful to the new contributors Mr Pete Harpum. Professor Steve Male. Dr Tony Merna and Mr Ian Vickridge. especially those who have participated in both editions. the responsibility for any errors remains entirely my own. and new diagrams from the authors supplied in a wide variety of formats for processing. particularly Professors Peter Thompson and Steven Wearne.Acknowledgements I am particularly grateful to my co-authors and fellow contributors to this book. Smith xv . The editor and authors would like to express their appreciation to Sally Mortimer for managing the existing artwork from the first edition. namely Dr Denise Bower. Mr Krisen Moodley and Mr David Wright. Nigel J. I would also like to thank Sally for checking and revising each of the many draft versions of every chapter.

List of Abbreviations ABS ACWP ADB ADR AfDB APM BAC BCWP BCWS BOD BOL BOO BOOST BOOT BoQ BOT BPR BRT BTO CBA CII CPD CPI CV DBOM DBOT DCMF DEO DETR DFA DfID Assembly breakdown structure Actual cost of work performed Asian Development Bank Alternative dispute resolution African Development Bank Association for Project Management Budget (baseline) at completion Budgeted cost of work performed Budgeted cost of work scheduled Build±operate±deliver Build±operate±lease Build±own±operate Build±own±operate±subsidise±transfer Build±own±operate±transfer Bills of quantities Build±operate±transfer Business process re-engineering Build±rent±transfer Build±transfer±operate Cost±benefit analysis Construction Industry Insitute (Texas) Continuing professional development Cost performance index Cost variance Design±build±operate±maintain Design±build±operate±transfer Design. construct. Transport and the Regions Design for assembly Department for International Development xvi . manage and finance Defence Estates Organisation Department of the Environment.

List of Abbreviations DFM DSM DTI EBRD ECC ECGD ECI EIA EIB EIS EMS EPC EPIC EQI ERP EU EVA FBOOT FIDIC GUI HMPS IFC IPT IRR MoD NEPA NGO NIF NPV OBS OECD PBS PC PEP PERT PFI PIC PIM PMI PSBR QA xvii Design for manufacturing Dependency structure matrix Department of Trade and Industry European Bank for Reconstruction and Development Engineering and construction contract Export Credit Guarantee Department European Construction Institute Environmental impact assessment European Investment Bank Environmental impact statement Environmental management system Engineer±procure±construct Engineer±procure±install±commission Environmental quality index Enterprise resource planning European Union Earned value analysis Finance±build±own±operate±transfer  de  ration Internationale des Inge  nieurs Conseils Fe (Lausanne) Graphical user interface Her Majesty's Prison Service International Finance Corporation Integrated project team Interest rate risk Ministry of Defence National Environmental Protection Agency Non-governmental organisation Note issuance facility Net present value Organisational breakdown structure Organisation for Economic Cooperation and Development Product breakdown structure Procure±construct Project execution plan Programme Evaluation and Review Technique Private finance initiative Procure±install±commission Personal information manager Project Management Institute Public sector borrowing requirement Quality assurance .

xviii List of Abbreviations QC QFD RUF SCA SCM SPI SPV SV TCM TCN TQM TUPE USGF VA VE VM VP VR WBS WMG WTA WTP Quality control Quality function deployment Revolving underwriting facility Structured concession agreement Supply chain management Schedule performance index Special project vehicle Schedule variance Travel cost method Third country nationals Total quality management Transfer of undertaking from previous employer US Gulf factor Value analysis Value engineering Value management Value planning Value reviewing Work breakdown structure Warwick Manufacturing Group Willingness to accept Willingness to pay .

the architects of ancient cities. `Management by projects' has become a powerful way to integrate organisational functions and motivate groups to achieve higher levels of performance and productivity. People were riveted at the sight of the Americans landing on the moon. 1. as a major building rises. The contribution that a knowledge of managing projects can make to management at large is greatly underrated and generally poorly known. yet the skills employed in managing projects. like many thousands of similar task-orientated activities. to the key requirements for success. Only recently has it been recognised as a central management discipline.Chapter 1 Projects and Project Management This chapter describes the various aspects of project management from what a project is. a new generation of observers is inspired. the masons and craftsmen of great cathedrals and mosques. questionable activity. or as a spectacular entertainment unfolds. and of the might of labour behind the Great Wall of China and other wonders of the world. project management was derided as a low-tech. All of these endeavours are projects. 1 . through its various stages. low-value. As a new road or bridge is opened. Major industrial companies now use project management as their principal management style. One stands in awe of the achievements of the builders of the pyramids. For years. Today's projects also command attention.1 The function of project management Managing projects is one of the oldest and most respected accomplishments of mankind. as a new computer system comes online. are not well known other than to the specialists concerned. whether major ones such as those mentioned above or more commonplace ones.

The common use of the word `project' for all of these is logical because every one is: o o o o o an investment of resources for an objective. refrigerator. It is a one-off investment. computer. dock. To get value from the investment. it costs money. bridge. refinery. defines a project as `a temporary endeavour undertaken to create a unique product or service'. The normal criterion for investing in a proposed project is therefore that the goods or services produced are more valuable than the predicted cost of the project. or the replacement. plant. large or small. novel to some degree. or in the equipment and structures forming a system. road. The UK Association for Project Management defines a project as `a discrete undertaking with defined objectives often including time. production line. steel mill. and some are presented below. The differences may extend to some novelty in the product. renewal or removal of an existing one. in the system of production.2 Projects A project can be any new structure. A number of definitions of the term `project' have been proposed. Projects thus vary in scale and complexity from small improvements to existing products to large capital investments. concerned with the future. and a package of work for any such project can in turn be a subsidiary project. aircraft. dam. In recent times. Every new design of car. related to an expected result. a project usually has a defined date for completion. sewer. So are many smaller examples. control system. USA. and differ from it only in detail to suit a change in market or a new site. but is short in its duration relative to the subsequent working life of the investment. One project may be much the same as a previous one. process.2 Engineering Project Management 1. system or software. the work for a project is a period of intense engineering and other activities. As a result. product sophistication and organisational change. cost and quality (performance) goals'. power station. crane. project managers have had to meet the demands of increasing complexity in terms of technical challenge. building or software package is a project. refurbishing. ship. a cause of irreversible change. . o o The Project Management Institute (PMI). A project is an investment of resources to produce goods or services.

general or operations management also involves the . it involes risk and uncertainty. but explicitly planned change. In contrast. The UK Association for Project Management defines it as `the planning. cost and performance criteria'. such that from the initial concept. having a start and a finish. o o o The PMI defines project management as `the art of directing and coordinating human and material resources through the life of a project by using modern management techniques to achieve predetermined goals of scope. organisation. The British Standards Institute (BS 6079) defines it as `the planning. cost. it may be concluded that a project has the following characteristics: o o o o o o it is temporary. time. it is the cause and means of change. From the above definitions.3 Project management The definition of project management stems from the definition of a project. with definite starting and finishing points. it is unique in some way. 1. it involves the commitment of human. undertaken by an individual or organisation to meet specific objectives with defined schedule. The common theme is that project management is the management of change. it has specific objectives. and implies some form of control over the planned process of explicit change. monitoring and control of all aspects of a project and the motivation of all involved to achieve project objectives safely and within agreed time. quality and participant satisfaction'.Projects and Project Management 3 o The British Standards Institute (BS6079) defines a project as `a unique set of coordinated activities. the change is directed towards the unique creation of a functioning system. material and financial resources. quality and performance'. cost and performance parameters'. monitoring and control of all aspects of a project and the motivation of all those involved to achieve the project objectives on time and to cost.

The nature and scale of activity change at each stage. The durations of the stages vary from project to project.1 Project life cycle. A typical life-cycle is defined by Wearne (1995) and shown in Figure 1. Figure 1. complexity. It should not be forgotten that projects are managed with and through people. and hence it is said to have a life-cycle. The needs of project management are dependent upon the relative size. urgency.4 Engineering Project Management management of change.1 shows the sequence in which the stages should be started. importance and novelty of a project. and delays sometimes occur between one stage and the next. Each project has a beginning and an end. Project management must look ahead at the needs and risks. The needs are also greater where projects are interdependent. assess progress and trends.1. anticipate problems. get quality and value for money. Therefore. as well as those that will hinder the development. This is not meant to show that one must be completed before the next is Figure 1. project management directs all the elements that are necessary to reach the objective. and change the plans if necessary to achieve the objectives. Widely different terminology for the various aspects of project management are used in different industries. complexity and speed of the activities and the resources employed as a project proceeds. but their purpose is to minimise and control the effects of change in an already constructed system. . particularly those competing for the same resources. Each stage marks a change in the nature. but they can all be related to this diagram. Stages can also overlap. communicate the plans and priorities.

a project is likely to be initiated when its promoter predicts that there will be a demand for the goods or services the project will produce. or if a project is urgent there may be no time to try to optimize the proposal. In addition. appraisal is omitted. The planners of the project should then draw on the records and experience of previous projects. Further progress requires the promoter to authorise the use of some resources to investigate these ideas and the potential demand for the project. At this stage. Feasibility study The appraisal stage is also known as the `feasibility study'. and the results from research indicating new possibilities. 1. More commonly. and the amount and quality of the resources available to investigate any risks that could affect the project and its useful life. These three sources of information ought to be brought together at this stage of a project. however. more expenditure has to be sanctioned. high risk levels do not necessarily mean that the project will not go ahead. there will usually be alternative ideas or schemes which all seem likely to meet the demand. so that the purpose of each stage should be to allow the next to proceed. The objective of the sequence should be to produce a useful result. as they are based upon predictions of demand and costs whose reliability varies according to the quality of the information used. the novelty of the proposals. or the conclusions of the appraisal may be disappointing and revised ideas are needed which are more likely to meet the demand.Projects and Project Management 5 started. a repetition of the work up to this point is often needed as its results may show that better information is needed on the possible demand. but rather that a higher rate of return is required. In emergencies.1.4 Project initiation As shown in Figure 1. and then how best to do so in order to achieve the promoter's objectives. The outputs from this phase can only be probabilistic. Repetition of the work may also be needed because the information used . The key feature of this phase is the decision as to whether or not the project is viable ± that is. alternative proposals have to be evaluated in order to decide whether to proceed. After the first appraisal. The next move is to appraise the ideas in order to compare their predicted cost with their predicted value. The term `sanction feasibility study' is used here to mean the decision to incur the cost of these investigations.

Project implementation Then follows the largest scale of activities and the variety of physical work needed to implement a project.6 Engineering Project Management to predict the demand for the project has changed during the time taken to complete the work. particularly the manufacture of equipment and the construction work necessary for its completion. that of making ideas succeed. development and research Design ideas are usually the start of possible projects. the activities change from assessing whether it should proceed to deciding how best it should be realised and to specifying what needs to be done.1. This work may be undertaken in sub-stages in order to investigate novel problems and review the predictions of cost and value before continuing with a greater investment of resources. as indicated in Figure 1. If a project is selected. Usually. and alternatives are investigated before estimating costs and evaluating whether to proceed any further. These two are distinct in their objectives. most of the design and the supporting development work for a project follows the decision to proceed. but its outcome will be quite specific: the sanctioning or rejection of the proposed project. The main design stage of deciding how to use materials to realise a project usually follows an evaluation and selection of those materials. Feasibility studies may therefore have to be repeated several times. Concluding this work may take time. Design and development share one objective. Scale and specialisation increase rapidly as the design proceeds. of a project. Research ascertains the properties and potential performance of the materials used. The sections of a project can proceed at different speeds in the design . Their relationship is therefore important. and therefore the success. Design. Most companies and public bodies who promote new capital expenditure projects employ contractors and sub-contractors from this stage on to supply equipment or carry out construction.1. Development in the cycle involves both experimental and analytical work to test the means of achieving a predicted performance. For internal projects within firms there is an equivalent internal process of placing orders to authorise expenditure on labour and materials. The decisions made at the design stage almost entirely determine the quality and cost. as indicated in Figure 1.

1. In all of these organisations there may therefore be conflicts in utilising resources to meet the competing needs of a number of projects. the project is completed late. Line B indicates completion. This sharing will be similar through all the subsequent stages in the cycle.Projects and Project Management 7 and subsequent stages. with a distinct increase in the level of investment as the project passes from concept to implementation. Line C indicates reduced net revenue.g. e. The problems encountered in meeting objectives vary from project to project. but would therefore be in competition with them for the use of these resources. Figure 1. because of the potential advantages of sharing expertise and other resources. and in the appraisal stage these compete for selection. A project is thus likely to be cross-linked with others at every stage shown in Figure 1. but all must come together to test and commission the resulting facility.1. or lower operational costs. alternative projects may be under consideration. worse sales price/ volume.5 Project risks Projects are investments of resources.g.g. or higher operational costs. The consequence is often that any one project depends upon the work of several departments or firms. Those selected are then likely to share design resources with others which may be otherwise unconnected. e. From this graph. The project has then reached its productive stage. This is demonstrated by the `typical investment curve' shown in Figure 1. Line A indicates increased income.1 is a model of what may be typical of the sequence of work for one project. and should be meeting the specified objectives. The criteria for appraisal also vary from industry to industry. These links enable people and firms to specialise in one stage or sub-stage of the work for many projects. They vary in content and in the extent to which experience can be adapted from previous projects in order to avoid novel problems. All projects are subject to risk and uncertainty. but the net revenue is then as forecast. as indicated in Figure 1. better than expected sales price/volume.2.1. deviations from the base investment profile (i. e. When you purchase . but common to all projects is the need to achieve a sequence of decisions and activities. risks) can be identified. At the start. Projects are rarely carried out in isolation from others.e. and each promoter investing a project may have problems in achieving the sequence of activities which best suits his interests. each of which is likely to be engaged on a variety of projects for a variety of customers.

2 Typical investment curve.8 Engineering Project Management Figure 1. .

this situation is not possible in projects where the promoter is required to make an investment prior to receipt of the product.g. This principle is illustrated in Figure 1. in other words. the costs of introducing change are magnified. 1. market demand.g. The nature of risk is that it can have both positive and negative effects on the project. Accordingly.). etc. This opportunity diminishes as the project passes through sanction to implementation because as more decisions are taken. or internally from the activities of the project (e. In other words. there are said to be upside and downside risks. Unfortunately. Conversely.3. the project becomes more closely defined.Projects and Project Management 9 goods from a retailer.3 Opportunity to add value. The curves indicate that it is during the definition and concept stages that the greatest opportunity exists to reduce cost or to add value to the project.6 Project objectives It is at the front end of the project cycle that the greatest opportunity exists for influencing the project outcome. delays due to the weather or unforeseen conditions. you are able to view them before purchase to ensure that they meet your requirements. . etc. projects are subject to uncertainty and consequent risk during the project delivery process. and hence the best time to explore Pre-project Decide what you want Project Design and construction Operation Earning Cost of late change Possible added value Opportunity Figure 1. political change. you are able to view the finished product prior to making your investment. Such risks may be generated from factors external to the project (e.).

and their inter-relationship is shown in Figure 1. where early completion is required. The positioning of the project in relation to the primary objectives is a matter of preference.10 Engineering Project Management options and make changes is at the concept stage and certainly not during implementation.4 The triangle of project objectives (adapted from Barnes and Wearne. as might be the case with the launch of a new product where it is necessary to obtain market penetration first. The use of an equilateral triangle in this context is significant. Projects are implemented to meet the objectives of the promoter and the project stakeholders. The term stakeholders is being used here to mean those groups or individuals who have a vested interest in the project. and nor does it mean that the quality can be compromised. Where minimum cost development is required. quality and time may have to be `sacrificed'. cost and quality. Figure 1. but may or may not be investors in it. but time is of the essence. meeting all three is almost impossible. 1993). and the relative importance of these objectives is clearly established. it is important that the project's objectives are clearly defined at the outset. That is not to say that the project can be completed at any cost. . then time is dominant.4. Primary objectives are usually measured in terms of time. Accordingly. such as for a community housing project. since whilst it may be possible to meet one or two of the primary objectives.

Not enough and the project is doomed to collapse from unexpected events. Definition of project objectives The greatest lesson of project management is that the first task is to establish. for example. and estimating the cost of the resources required for it.Projects and Project Management 11 Where ultimate quality is required. The volume of events taking the team by surprise will be just too great for them to have any chance of meeting the objectives. Time and money Planning when to do work. 1. Inadequate definitions and the poor communication of objectives are common causes of failure in projects. . Risks To succeed. plans which are too detailed will quickly become out-of-date and will be ignored. However. must be considered together. then cost and time may be secondary issues. success cannot be achieved. in high-technology projects. Project planning The form and amount of planning have to be just right. If the risks are not identified. An alignment meeting should be held with all key staff to ensure that all decisions are optimised in terms of the project objective.7 Project success The evidence indicates that the success of projects now and in the future may depend upon the factors listed below. Early decisions Many project successes demonstrate the value of completing much of the design and agreeing a project execution plan before commitment to the costly work of manufacturing hardware or constructing anything on-site. define and communicate clear objectives for every project. the promoter's team should then assess the uncertainties of meeting the project objectives. as. except in emergencies. The relative importance of each objective must be given careful consideration because decisions throughout the project will be based on the balance between them.

large or small. and sometimes in setting the objectives themselves. otherwise information comes too late. These records are then used to allocate blame for problems. e. The information then becomes a mere record. The nature of the work on a project changes month by month. whether part-time or full-time. The team should be assembled in time to assess and plan their work and their system of communications. The committed project team should be located where the main risks have to be managed. or goes to the wrong place for decisions to be made. contractors and others who are to provide goods and services should likewise be appointed in time to mobilize their resources. All people contributing to a project. Communications The promoter and the leader Every project. in rescue operations to save life. The results of informal communications also need to be known and checked.g. The designation `emergency' should be limited to work where the cost is no restraint on using any resources available to work as fast as is physically possible. Many projects have failed because the communications were poorly organized. A real emergency is rare. should feel that they are committed to a team.12 Engineering Project Management Emergencies and urgency A project is urgent if the value of completing it faster than normal is greater than the extra cost involved. needs a real promoter. rather than to stimulate decisions which will control the problems. The separation of people causes a misunderstanding of objectives. Consultants. and so do the communications needed. The volume and importance of communication can be huge. A system of communication needs to be planned and monitored. communication errors and poor use of expertise and ideas. train and brief staff. Representation in decisions Success requires the downstream parties to be involved in deciding how to achieve the objectives of a project. suppliers. and assess and plan their work. Human systems do not work well if the people who make the initial decisions do not involve those who will be affected later. and is of little value. a project champion . concentrated teams tend to correlate with success. A committed project team Dispersed project teams tend to correlate with failure. as bad news often travels inaccurately.

the circumstances it assumes materialise and the plan is well communicated. extra costs. This has delayed actions and so caused crises. Good delegation requires prior checking that the recipients of delegated authority are equipped to make the decisions delegated to them. this person is called `the project manager'. Drive in solving problems is then very valuable. The reasons for decisions have to be understood above. as well as to manage. depending upon the size and remoteness of the project. or if people do not know the plan. every sub-project should have its leader with power over the resources it needs. or do not understand and accept it. Much more is needed if circumstances do change. and failure is its other name. and loss of respect and confidence in management. The project manager may have other jobs. before and after in order to guide the subsequent decisions.Projects and Project Management 13 who is committed to its success. Delegation of authority Inadequate delegation of authority has caused the failure of many projects. problems. and subsequent monitoring of how effectively they are making those decisions. Many projects have failed because the authority for parts of a large project was delegated to people who did not have the ability and experience to make the necessary decisions. In the rest of this book. every decision leads to the next one and depends upon the one before. Power over the resources needed to deliver a project must be given to one person who is expected to use it to avoid. Reasons for decisions In project management. This does not mean making their decisions for them. . below. Control is no substitute for planning. project scope and plans Some crises resulting in quick changes to plans are unavoidable during many projects. particularly where decisions have been restrained by the requirement for approval by people remote from a problem. In turn. but failure to think through the decisions made can cause greater problems and loss of confidence in project leaders. Control If the plan for a project is good. divergence from the objectives is almost inevitable. It can waste potentially productive time in reporting and explaining events too late to influence them. Changes to responsibilities. few control decisions and actions are required. Without this.

Skill and patience in communication are particularly needed in the rapidly changing relationships typical of the final stages of large projects. judgement. Using past experience Success is more likely if technical and project experience from previous projects is drawn upon deliberately and from wherever it is available. suppliers. Training cannot create these qualities or substitute for them. energy and persistence. to improve. The terms of the contracts should allocate the risks appropriately between customers. Perhaps the frequent failure to do this is another consequence of projects appearing to be unique. contractors and sub-contractors. but it can greatly help people to learn from their own and other people's . to review performance.14 Engineering Project Management Failure to give reasons for decisions and to check that they are accurately understood by their recipients can cause divergent and inconsistent actions. Adapting to external changes Market conditions. customer's wishes and other circumstances change. The ability to transfer experience forward by making the appropriate comparisons is one of the hallmarks of a mature applied science. and to respond to difficulties. It requires people to counsel each other across levels of the organisation. and technical problems appear as a project proceeds. Project managers have to be adaptable to these changes. All projects have similarities and differences. Induction. to move sideways when circumstances require. Success requires team work to be developed and sustained professionally. Contract strategy Contract terms should be designed to motivate all parties to try to achieve the objectives of the project and to provide a basis for project management. team building and counselling Success in projects requires people to be brought into a team effectively and rapidly using a deliberate process of induction. Training Project management demands intelligence. and not antagonistic. yet able to foresee those which are avoidable and act appropriately. It is often easier to say `this one is different' than to take the trouble to draw experience from previous ones. Contract responsibilities and communications must be clear.

L. 2nd edn.H.G. et al. 3rd edn. revised edn. (1998) Managing Risk in Construction Projects. London. N. . Prentice Hall. (1996) How to Run Successful Projects. Upper Darby. 2nd edn. P. BS 6079 (2000) Guide to Project Management. Further reading APM (1998) Body of Knowledge. Turner. Thomas Telford. In such a situation. 1st edn. Smith. Oxford. All improvements cost effort and money. Thompson. Coventry.J. London.M. (1995) Engineering Project Management. (1989) Control of Engineering Projects. United Nations Industrial Development Organization. Smith) Blackwell Science. London. London. and Barnes. (2000) The Handbook of Project-Based Management. UNIDO (1994) Manual for the Preparation of Industrial Feasibility Studies. After completion.W. but some will be chosen as priorities depending upon the situation and its problems. S. All of them should be considered. and obtain the full benefit of. (Ed. P. Gower. References Wearne. a large project may require retraining of the general management so that they understand..J. Association of Project Managers. Blackwell Science.Projects and Project Management 15 experience. British Standards Institute.H. N. Project Management Institute. New York. (1997) The Management of Projects. F. 4th edn. O'Connell. Wearne. Morris.A. S. Thomas Telford. PMI (2000) A Guide to the Project Management Body of Knowledge. London. N. Towards perfect projects The chapters in this book describe the techniques and systems which can be used to apply the lessons of experience. R. 2nd edn. the organization should also estimate the cost of not removing a problem. PA. London. its effect on corporate operations. Cost is often given as a reason not to make a change.

and increasingly by service industries. implementation and operation phases of a project. 16 .Chapter 2 Value Management This chapter includes the basic terminology and procedures associated with value management. general engineering. 2. It then considers the role of value management within the context of a project.1 Introduction Over the past decade. According to the Institution of Civil Engineers (1996): Value management addresses the value process during the concept. and a number of different definitions have arisen to describe the same approach or stage of application. and for all types of clients from private industry to governmental organisations. automotive and construction industries. It encompasses a set of systematic and logical procedures and techniques to enhance project value through the life of the facility. value engineering (VE) or value analysis (VA). 2.2 Definitions There are no universally accepted definitions. The term `value management' (VM) has become a blanket term that covers all value techniques whether they entail value planning (VP). there has been a trend towards applying value techniques at ever earlier stages in a project's life-cycle. VM is used by electronics. definition. VM techniques have also been successfully applied on all types of construction from buildings to offshore oil and gas platforms. aerospace.

In addition. However. design or project against predetermined expectations. Value planning (VP) is the title given to value techniques applied during the concept or `planning' phases of a project. the fundamental reason why the project element or component exists or is being designed). and to compare a completed. Therefore. and generally end when the design is complete and the construction has started. VE investigates. Value management involves functional analysis. the highest level of quality for a given cost. and not only about cutting cost (which is often a by-product). VE can also be applied very effectively during construction to address any problems or opportunities which may arise. which include those listed below. operating in multi-disciplinary groups using the job plan and creativity techniques. Value analysis (VA). Value engineering (VE) is the title given to value techniques applied during the design or `engineering' phases of a project. life-cycle costing. or an optimum compromise between the two. performance and methods. Maximum value is obtained from a required level of quality as the least cost.Value Management 17 Value management (VM) is the title given to the full range of value techniques available. The philosophy of VM centres on the identification of the requirements. the term VA may be applied to the analysis of non-construction-related procedures and processes. VA studies are those conducted during the post-construction period and may be part of a post-occupancy evaluation exercise. compares and selects amongst the various options available those that will meet the value requirements of the stakeholders. or nearly completed. It explores . VM is the management of a process to obtain maximum value on a scale determined by the client. VM is about enhancing value. including the various studies which are undertaken. such as studies of organisational structure or procurement procedures. are illustrated in Figure 2.e.1. VP and VE are applied mainly in the concept and definition phases. is the title given to value techniques applied retrospectively to completed projects to `analyse' or to audit the project's performance. VP is used during the development of the brief to ensure that value is planned into the whole project from its inception. or value reviewing (VR). The latter typically derive from feedback from the site relating to specific conditions. analyses. This is achieved by addressing and ranking stakeholders' requirements in order of importance. The typical terms for VM studies at different stages of a project. and establishing comparative costs in relation to function. Functional analysis is a technique designed to help the appraisal of value by a careful analysis of function (i.

1 Value management structures at different project phases.18 Value management Value planning Value engineering Value review Pre-investment phase Budgeted projects Implementation Operation Investment phase End of assets Unbudgeted Engineering Project Management Concept Feasibility Appraisal Operation Pre-feasibility Procurement training Decommissioning Close out Define project Define project approach Develop approach/design Develop detailed approach Procurement and training Handover/post project evaluation Strategy: Corporate. Business & Project Feedback Next project Figure 2. .

the quality of ideas generated determine the worth of the approach. Workshops are held where people work together to identify alternative options using idea generating techniques such as brainstorming. (1) Orientation: the identification of what has to be achieved and the key project requirements. A job plan is a logical and sequential approach to problem solving which involves the identification and appraisal of a range of options. different options for resolving the requirement are identified. Development: the development of the most promising options and their more detailed appraisal.Value Management 19 function by asking the initial question `what does it do?'. Implementation and feedback: an examination of how the recommendations were implemented in order to provide lessons for future projects. The requirement is defined. values. 1996). Recommendation for action. . The process is designed to identify alternative. Evaluation: the evaluation of the alternative options identified in the speculation stage. some broad categories which can be used for life-cycle costing are given below. wants. time scale and other project constraints. these options are evaluated and the option(s) with the greatest potential is selected (HM Treasury. (2) (3) (4) (5) (6) (7) As speculation is crucial in the job plan. In the case of a building. Life-cycle costing is an essential part of value management. The seven key steps of a job plan are given below. functional analysis is less applicable to this stage. priorities and desirable characteristics Information: the gathering of relevant data about needs. broken down into their constituent steps and used as the basis of the value management approach. Functional analysis is more applicable to the detailed design of specific components (or elements) of a project. Because the function cannot be defined so clearly in the project identification stage. more valuable and/or cost-effective ways to achieve the key functional requirements. It is a structured approach used to address all elements of the cost of ownership based on the anticipated life-span of a project. Central Unit on Procurement. costs. Speculation: the generation of alternative options for the achievement of client needs within stated requirements. and then examining how these functions are achieved. risks.

corporation tax) and development grants. air conditioning. tax allowances (capital equipment allowances. maintenance (cleaning and servicing). caretaker. long-term user dissatisfaction or excessive operating costs. Generally. Energy costs: heating. claims. etc. regularly reviewed and updated as the project progresses. planned replacement of components). Replacement of components (i. whereas land appreciates in value. Some of these are: o o inadequate time available habitual thinking/tradition . It is necessary to separate the value of the building from the value of the land when determining these credits in the context of a building. a series of reviews. legal fees. and scope of. Therefore. o o o o o A value management plan is drawn up which should be flexible. This plan should establish: o o o o a series of meetings and interviews.e.20 Engineering Project Management Investment costs: site costs. building costs. security and doormen. the purpose and timing of the reviews. 2. engineer). design fees (architect. In addition.3 Why and when to apply VM Projects suffer from poor definition because inadequate time and thought are given to them at the earliest stages. any project. buildings depreciate until they become economically or structurally redundant. quantity surveyor. and insurance rates. Residual or terminal credits. capital gains. lifts. lighting. This results in cost and time overruns. one of the major tasks of stakeholders is to identify at the earliest possible stage the need for. Non-energy operation and maintenance costs: these include letting fees. who should attend. repair (unplanned replacement of components). Another basic reason to use VM is because there are almost always elements involved in a project which contribute to poor value. any project should be initiated only after a careful analysis of need.

key decisions are rational. performance. explicit and accountable. reliability and quality. and is multi-disciplinary. VM depends fundamentally on whether or not stakeholders can agree on the project objectives from the start. cost and quality. VM aims to maximise project value within time and cost constraints without detriment to function. When properly organised and executed. and not just about cutting cost (although this is often a by-product). . Indeed. alternative options are always considered. auditable and accountable. However. is structured. it should be recognised that improving project value sometimes requires extra initial expenditure.Value Management conservatism and inertia attitudes and influences of stakeholders lack of or poor communications lack of coordination between the designer and the operator lack of a relationship between design and construction methods outdated standards or specifications absence of state-of-the-art technology honest false beliefs/honest misconceptions prejudicial thinking lack of the necessary experts lack of ideas unnecessarily restrictive design criteria restricted design fee temporary decisions that become permanent scope of changes for missing items lack of essential information 21 o o o o o o o o o o o o o o o o VM is primarily about enhancing value. VM will help stakeholders to achieve value for money (the desired balance between cost and function which delivers the optimum solution for the stakeholders) for their projects by ensuring that: o o o o o o the need for a project is always verified and supported by data. It seeks to maximise the creative potential of all departmental and project participants working together. the design evolves within an agreed framework of project objectives. outline design proposals are carefully evaluated and selected on the basis of defined performance criteria. is seeking to achieve an optimal balance between time. is focused on value rather than cost. The key differences between VM and cost-reduction are that the former is positive. project objectives are openly discussed and clearly identified.

when establishing a structure for dealing with value for money on projects. It is paramount that all stakeholders (investors.4 How to apply VM There is no single correct approach to VM. end-users and others with a real interest in the project outcome. In addition. as well as an external team with the relevant design and technical expertise. such as the project team. there are a number of stages which are common to all of them. This plan should establish: o o a series of meetings and interviews. It is apparent that all stakeholders should participate in the process. However. . particularly at the `review' stages. the elimination of unnecessary cost. In some cases an external professional must undertake this role. The project sponsor should ensure that a value management plan is drawn up and incorporated into an early draft of the project execution plan (PEP). on smaller ones VM might be undertaken by the project sponsor's professional adviser. specialist suppliers) must be involved in the process. a shared understanding among key participants. there may be a need for expert assistance. project manager or construction manager. The only differences are connected with the level and stage of the involvement. Some of these stages may overlap depending on the type of project.22 Engineering Project Management The key to VM is to involve all the appropriate stakeholders in structured team thinking so that the needs of the four main parties to a project can be accommodated where possible. a series of reviews. (Norton and McElligott 1995) VM can also provide other important benefits: o o o o o improved communication and teamworking. 2. but although projects vary. (HM Treasury. constructors. designers. better quality project definition. 1996) The single most critical element in a VM programme is top-level support. increased innovation. and with the party responsible for holding the procedures. especially during the VP and VE stages. while on larger or more complex projects an independent/external value manager is needed. owner.

safety. operation and maintenance should be considered during all VM reviews and evaluation options. to evaluate developing design proposals. to review and evaluate key design decisions.Value Management who should attend. to evaluate the broad project approach/outline design. Establish a hierarchy of objectives by ranking them in order of . To exploit the benefits of VM while avoiding unnecessary disruption. its key objectives and its constraints. Too many and the process may be disrupted and delayed. The first review should cover the items listed below. during the pre-feasibility stage.5 Reviews All reviews should be structured to follow the job plan. and what will be required of them at different stages. to learn lessons for future projects. the key participants. especially at the feasibility stage. These are: o o o o o o o during the concept stage. It is essential that the project sponsor and the value manager prepare for reviews by deciding on the objectives and outputs required. to reduce costs or improve buildability or functionality. during commissioning/operation. to remedy possible malfunctions or deficiencies. the purpose and timing of the reviews. 2. to help identify the need for a project. during the scheme design (feasibility stage). Issues of buildability. during the detailed design (appraisal stage). The precise format and timing of reviews will vary according to the particular circumstances and timetable. there are at least seven obvious `opportunity points' for reviews which arise on the majority of projects. Each of these reviews also provide an opportunity to undertake concurrent risk assessments. during decommissioning/end of assets. Too few and opportunities for improving definition and the effectiveness of the proposals may be lost. regularly reviewed and updated as the project progresses. 23 o o It should not be a rigid schedule but a flexible plan. (1) (2) List all objectives identified by stakeholders. during construction/implementation.

objectives and priorities. with all the associated detrimental impacts on cost. (1) (2) (3) (4) (5) Review the validity of the hierarchy of objectives with stakeholders and agree modifications. it should not encourage them. Identify potentially valuable options. . Consider. if necessary. (1) (2) (3) (4) (5) (6) (7) Confirmation that the project is needed. This balanced statement of needs.24 Engineering Project Management priority. delay/postpone). time and quality. The second review should show the following results. (3) (4) (5) (6) The first review should show the following results. The second review should cover the items listed below. VM aims to eradicate the need for late changes. not simply to drop lesser priorities. A statement of the primary objective. It is important to stress that the aim is to produce a priority listing. Identify broad approaches to achieving objectives by brainstorming. Develop an agreed recommendation about the most valuable option which can form the basis of an agreed project brief. what has to be done to satisfy the objectives and priorities. Produce a programme for developing the project. Evaluate the feasibility of the options identified. helps the project sponsor to produce the project brief. A favoured option(s) for further development. and preferably recommend. i. A `hierarchy' of project priorities. (1) A clear statement of the processes to be provided and/or accommodated.e. the most promising option for further development. A decision to reject/abandon or postpone/delay. Examine the most promising option to see if it can be improved further. A decision to proceed. agreed by all stakeholders. A description of the project. Appraise the feasibility of options (reject/abandon. Reducing the list runs the risk of having to reintroduce priorities at a later stage.

Clear recommendations for the finalisation of the sketch design. That is why VE techniques are also part of this stage which should cover the following points. The basis of a case for the continuation of design development. evaluating and recommending the proposals of the constructor and addressing problems that may emerge during construction. The basis of a submission for final approval to implement. Review key decisions against the project brief by brainstorming to identify ways of improving the design proposals outlined to date and to identify options.Value Management (2) (3) A preferred outline design proposal. some 10±30% of the design work will be completed. the value team will seek answers to the following questions to help determine value and function. focusing on and resolving any perceived problems. by analysing. Agree on a statement of the option to be taken forward. 25 During the third phase/feasibility stage. Develop the most valuable option to enhance value. and agree on a plan for the continued development of the design. Evaluate options in order to identify the most valuable one. o o o o o o What is it (i.e. VE is aimed at finding the engineering. By reviewing design proposals in this way. (4) (5) (6) The third review should show the following results. the purpose of the project or element)? What does it do? What does it cost? How valuable is it? What else could do the job? What will that cost? . architectural and technical solutions to help translate the design scheme selected by VP into a detailed design which provides the best value. (1) (2) (3) A thorough evaluation of the sketch design. Check that the key design decisions taken since the last review remain relevant to the hierarchy of objectives and priorities. (1) (2) (3) Review the project requirements and the hierarchy of objectives agreed at the last review. abandon or postpone the project.

operating and life-cycle costs. (5) (6) . A description of the value proposals. A decision on what remedial actions should be taken. An assessment and evaluation of the contractors' proposed changes. maintenance or operation. (1) (2) (3) (4) A measure of the success of the project in achieving its planned objectives. and improvements in reliability. (4) (5) The sixth review should show the following results. have been remedied. capital. according to the findings of the previous review. practical recommendations for improvements which can be implemented immediately. or were expected to change during the course of the project. including defects. Some forward-looking. (1) (2) (3) Promotion of a continuous VM approach throughout the construction process.26 Engineering Project Management The fourth review should show the following results. the redesign fee and the time associated with the recommended changes. to assess whether those changes were accommodated. procedures and any problems (such as delays) which may reduce benefits. An assessment of whether the objectives of the users/customers have been met. A prediction of the potential costs and savings. Identification of the reasons for any problems that have arisen. implementation costs. and an explanation of the advantages and disadvantages of each in terms of estimated savings. Check that any risks to the project are being managed. An investigation and verification of the feasibility of significant changes and the cost savings claimed. If those objectives changed. (1) (2) (3) Promotion of a continuous VM approach throughout the design process. A record of the lessons which have been learnt which could improve performance on subsequent or continuing projects. (4) (5) The fifth review should show the following results. A check that any outstanding work. A timetable for decisions of the owner. Finalisation of the original and proposed designs and the basis for the changes. as well as the implications of including them in the programme.

support.6 Procedures and techniques There are many procedures and techniques available within VM for the value team to use as they see fit. systems appropriateness. involvement. dedication. rerun of the exercise. o o o o o Have good ideas emerged? Were any adopted? Were they implemented? Did the expected value improvement result? If not. approval process. application. change of approach. use. whether applied former or intuitively. effectiveness and management of the change process of the stakeholders. 2.Value Management 27 Practitioners and users of VM must obtain feedback on its success. since feedback influences the results by raising the following questions. why not? Factors which will be assessed include the judgement. change of system. foot-dragging. Actions that can emerge from the feedback include: o o o o a a a a change of personnel. Typical techniques and procedures include: o o o o o o o o o o o o information gathering cost analysis life-cycle costing Pareto's law basic and secondary functions cost and worth FAST diagramming (function analysis) creative thinking and brainstorming criteria weighting value tree checklists/attribute listing analysis and ranking of alternatives .

. Identifies and prioritises the key objectives of a project. There follows a very brief list of such benefits. issues and problems which might not otherwise have been identified. teamwork and perseverance emphasised. The incentives and benefits to all stakeholders have been identified and discussed. o o o o o o o o o o o o o o o o o o Provides a forum for all concerned parties in a project development.7 Benefits of value management Properly organised and executed VM provides a structured basis for both the appraisal and development of a project. not just initial costs. Provides an authoritative review of the entire project. Improves the quality of definition. Maintains a strategic focus on the organisation's needs during the development and implementation of a project.8 Summary The key features of the value process and the application of VM to it have been described. Provides a priority framework against which future potential changes can be judged. Provides a means to identify and incorporate project enhancements. the inclusion of appropriate enabling clauses in contracts and agreements. Promotes innovation. and the importance of value planning.28 Engineering Project Management 2. Identifies project constraints. and results in many benefits to that project. and superfluous items. Usually results in remedying project deficiencies and omissions. Provides management with the information it needs to make informed decisions. Crystallises an organisation's brief priorities. These are underpinned by three particular aspects: the independence of the value manager clearly to establish the stakeholders' value criteria. Permits a large return on a minimal investment. Ensures all aspects of the design are the most effective for their purpose. Develops a shared understanding among key participants. 2. Identifies and eliminates unnecessary costs. Deals with the life cycle. Identifies and evaluates the means of meeting needs and objectives. not just a few elements. the planned application of team brainstorming.

(1996) Value Management in Construction: A Client's Guide. A. focusing on the function. S. London. Value Management. an integrated team environment. J.R. Macmillan. London. W. London. Further reading Connaughton. Norton. VM must have comprehensive top management understanding and support. and McElligott. (1994) Managing Innovative Projects. (1995) Value Management in Construction.Value Management The factors needed to ensure success of VM include: o o o o o o o o 29 a systematic approach. and an enthusiastic.D.C. London. B.N. HMSO. the establishment of value criteria. CIRIA. Chapman & Hall. sustained and innovative approach. consideration of a project on a life-cycle cost basis. the generation of records and an audit trail. Thomas Telford. References HM Treasury (1996) Central Unit on Procurement Guidance Note 54. Institution of Civil Engineers (1996) Creating Value in Engineering Projects. London. a collaborative and non-confrontational working environment. . and Green. the facilitation of creativity as a separate stage. Webb.

and describes risk management techniques in detail. in the early stages of the project cycle. This chapter outlines the stages of a project. 3. the life-cycle of the project can be divided into three major phases: the appraisal and implementation of the project. which consume mainly human expertise and analytical skills. In most engineering projects. sometimes referred to as feasibility study. the need for early entry into a competitive market may outweigh all other considerations. is an important stage in the evolution of a project. to the design.1 Initiation An individual project. by external factors such as statutory approvals. In the public sector. particularly finance. the rate of expenditure changes dramatically as the project moves from the early stages of studies and evaluations. followed by the operation of the completed facility. and indicates that considerable cost will be incurred before any benefit accrues to the promoter from use of the completed project (or asset). It is also likely that. and identify and assess risks at a time when data is uncertain or unavailable. however significant and potentially beneficial to the promoting organisation. The progress of any project will therefore be subject to investment decisions by the parent organisation before the project is allowed to proceed.1.Chapter3 Project Appraisal and Risk Management Project appraisal. will only constitute part of a corporate business. 30 . several alternative projects will be competing for the available resources. In a commercial situation. and also by the project's objectives. A typical investment curve is shown in Figure 3. appraisal may extend over many years and be subjected to several intermediate decisions to proceed. manufacture and construction of a physical facility. It is important to consider alternatives. The precise shape of the curve will be influenced by the nature of the project. When considering the investment curve.


32 Engineering Project Management Two important factors emerge when studying the investment curve: o o That interest payments compounded over the entire period when the project account is in deficit (below the axis in Figure 3. The promoter's objectives in pursuing this investment must be clearly stated and agreed by senior management early in the appraisal phase. and it is particularly important that the project team know whether a minimum time for completion or minimum cost is the priority. and this requirement will greatly influence both the appraisal and the implementation of the project. (1) Clear objectives. and `sanction' in Figure 3. The primary objectives of quality. the investing organisation is committing itself to major expenditure and is assuming the associated risks. If the decision is positive. The sanction decision therefore implies that the investor is prepared to take the risk. time and cost may well conflict. the organisation will then proceed with the major part of the investment in the expectation of deriving some predicted benefit when the project is completed. In order to make a wellresearched decision. This is the key decision in the life-cycle of the project. the promoter will require information under the headings listed below. This relates to the commercial environment in (2) . which frequently extend over a period of many years.1. 3. for all that follows is directed at achieving these objectives in the most effective manner. These are rarely compatible. Market intelligence. and the development of the project concept. will generate different degrees of uncertainty. The first signifies that the ill-defined idea evolved from research and studies of demand is perceived to offer sufficient potential benefit to warrant the allocation of a specific project budget for further studies. The subsequent sanction decision signifies acceptance or rejection of these detailed proposals. All these estimates and predications. That the investor will not derive any benefit until the project is completed and in use.1) will form a significant element of project costs.2 Sanction When a project is sanctioned. It is likely that at least two independent and formal investment decisions will be necessary. they are labelled `initiation' or `viability'.

and to allocate appropriate contingency funds. the need to minimise the period of investment. Project execution plan. are defined. and include a programme showing the timing of key decisions and the award of contracts. Estimates and predictions made during appraisal will extend over the whole life-cycle of the implementation and operation of the project. and will frequently generate imaginative responses to potential problems. taking account of all constraints and risks. and the knowledge that expenditure on appraisal will have to be written off if the project is not sanctioned. A thorough study of the uncertainties associated with the investment will help to establish confidence in the estimate. the outcome of the appraisal. This study is designed to assist the promoter to make informed and rational choices concerning the nature and scale of investment in the . Consequently. there is conflict between the desire to gain more information and thereby reduce uncertainty.Project Appraisal and Risk Management 33 (3) (4) (5) which the project will be developed and later operated. Realistic estimates/predictions. this plan will define the likely contract strategy. thereby reducing risk. single-figure estimates are likely to be misleading. as defined in the concept and brief accepted at sanction. However. it will highlight areas where more information is needed. It is easy to be over optimistic when promoting a new project. 3. More importantly at this early stage of project development. However. Expenditure on the appraisal of major engineering projects rarely exceeds 10% of the capital cost of the project. as shown in Figure 3. and anticipate technological developments and the actions of competitors. review and evaluation undertaken as the project. It is necessary to study and predict trends in the market and the economy. will freeze 80% of the cost. Assessment of risk.2. This should give guidance on the most effective way to implement the project and to achieve its objectives. or alternative concepts of the project. The opportunity to reduce the cost during the subsequent implementation phase is relatively small.3 Project appraisal and selection Project appraisal is a process of investigation. and due allowance for uncertainty and exclusions should be included. It is widely held that the success of a venture is largely dependent on the effort expended during the appraisal preceding sanction. Ideally.

.34 Percentage cost Possibilities of reducing cost Investment decision Engineering Project Management Accumulated amount of investment Decision steps Preplanning Planning Design and construct equipment Installation of equipment IMPLEMENTATION Time APPRAISAL Figure 3. showing how the important decisions for any project are made at the start of that project.2 Graph of the percentage cost against time taken.

The resulting proposal prepared for sanction must define the major parameters of the project: the location. the size of the facility. Investment decisions may be constrained by non-monetary factors such as: o o organisational policy. strategy and objectives. The core of the process is an economic evaluation. it may be that market conditions or other commitments impose a programme deadline. and to provide the brief for subsequent implementation. the technology to be used. together with forecasts of the market and predictions of the cost±benefit of the investment. especially money. There is usually an alternative way to utilise resources. The appraisal is likely to be a cyclic process repeated as new ideas are developed. all alternative concepts and ways of achieving the project objectives should be considered.25 years at a rate of inflation of 10%. . The cost of a project will double in 7. In inflationary times. The consequences of an inadequate or unrealistic appraisal can be expensive. based on a cash flow analysis of all costs and benefits which can be valued in money terms. until the promoter is able to make the critical decision to sanction implementation of the project and commit to the investment in anticipation of the predicted return. Normally. when the customer's processing factory will be ready. management or technology. additional information received and uncertainty reduced. Indeed. this means as soon as possible. it is doubly important to complete a project as soon as possible because of the adverse relationship between time and money. because no profit can be made until the project is completed. and this is capable of being quantified. a customer will not buy your product unless it is available by mid-2002. which contributes to a broader assessment called cost±benefit analysis. this is the time to defer further work or abandon the project. however roughly. It is important to realise that if the results of the appraisal are unfavourable. for example. Ideally. the availability of resources such as manpower. A feasibility study may form part of the appraisal.Project Appraisal and Risk Management 35 project. and the sources of finance and raw materials. Programme It will be necessary to decide when is the best time to start the project based on the previous considerations.

It may well be that the promoter's cash availability defines the speed at which the project can proceed. although these are often considerable. a realistic time-scale and programmes for project implementation. for example for insurance or unconventional contractual arrangements.36 Engineering Project Management It will therefore be necessary to determine the duration of the appraisal. considering whether the extent or nature of the major risks are such that the normal transfer routes may be unavailable or particularly expensive. At the appraisal stage. so that project costs can be determined. The importance of time should be recognised throughout the appraisal. and would be extended by any delay. duration and benefits. and its significance taken fully into account. design and construction phases o o o so that the operation date can be determined. It is recommended that efforts should concentrate on: o o o seeking solutions which avoid/reduce risk. The extent and effects of change are frequently underestimated during this phase. outlining any special treatment which may need to be considered for risk transfer. At appraisal. The programme must therefore be realistic. The overriding conclusion drawn from recent research is that all parties involved in construction projects would benefit greatly from reductions in uncertainty prior to financial commitment. when determining the objectives of the project. Risk and uncertainty The greatest degree of uncertainty about the future is encountered early in the life of a new project. Many costs are time-related. particularly in developing countries and remote locations. appropriate specifications for performance standards. and therefore the risk response should be characterised by a broad-brush approach. the level of project definition is likely to be low. Decisions taken during the appraisal stage have a very large impact on final cost. . and so that the promoter's liabilities can be assessed and checked for viability. the engineering and project management input will normally concentrate on providing: o o o a realistic estimate of capital and running costs.

maintenance policies and requirements should be stated as these will affect both design and cost. Engineering/project managers will usually have less responsibility for identifying the revenues and benefits from the project. as not all the benefits/ disbenefits will be quantifiable in monetary terms. These will normally include discounting techniques.4 Project evaluation The process of economic evaluation and the extent of uncertainty associated with project development require the use of a range of financial criteria for the quantification and ranking of the alternatives. For many projects this assessment is complex. The involvement of project managers in the planning team is recommended. which is likely to range from a minimum of 8 or 10 years for a plant manufacturing consumer products. Phasing of the development should always be considered. Even at this early stage of project definition. we might drown a historic monument. but care must be taken when interpreting the results for projects of long duration. identifying comparative differences in the riskiness of alternative project schemes. Cost±benefit analysis In most engineering projects. For others. In all cases. factors other than money must be taken into account. it may be necessary to consider the development in the context of several different scenarios (or views of the future).Project Appraisal and Risk Management 37 o o setting realistic contingencies. They must span the overall period of development and operation of the project. If a dam is built. the predictions are concerned with the future needs of the customer or community. as the appraisal is essentially a multi-disciplinary brainstorming exercise through which the promoter seeks to evaluate all alternative ways of achieving these objectives. Special emphasis should be given to future maintenance during the appraisal of projects in developing areas. and estimating tolerances consistent with the objective of preparing the best estimate of anticipated total project cost. but is frequently conveniently ignored. to 30 years for a power station and much longer for public works projects. The cost of dismantling or decommissioning may also be significant. . 3. this is usually the function of marketing or development planning departments.

increase the growth of new industry because of the reduced risk. The scope of the secondary benefits to be taken into account frequently depend on the viewpoint of the analyst. the viewpoint from which each project is assessed plays a critical part in properly assessing both the benefits and cost which should be attributed to a project. the economic cost of labour may be nil. since the use of labour in this project does not preclude the use of other labour for other purposes. Even factors to which no monetary value can be assigned must be taken into consideration. which is to produce the greatest possible benefit for a given cost. to quantify in monetary terms. and so on. no matter what the unemployment level. However. it is surely not something we can afford to ignore. a public-sector owner could quite properly include the recreational benefits in its cost±benefit analysis. however. Essentially. it is obvious that each project should be designed at the minimum cost which will allow the fulfilment of the objectives. Those with a higher cost±benefit ratio will be preferred. . If the evaluation is confined to purely financial considerations. for instance. the cost of labour is equal to the market rate of remuneration. In comparing alternatives. Methods are available to express. Cost±benefit analysis provides a logical framework for evaluating alternative courses of action when a number of factors are highly conjectural in nature. The analysis should be applied to projects of roughly similar size and patterns of cash flow.38 Engineering Project Management reduce the likelihood of loss of life due to flooding. For instance. it fails to recognise the overall social objective. or even impossible. and although it may not be possible to put a figure on the value of human life. For the public developer. The maximum net benefit ratio will be marginally greater than the next most favoured project. which therefore cannot enter into its cost±benefit analysis. including the appropriate quality. level of performance and provisions for safety. it may derive no benefit from the coincidental provision of additional public recreational facilities. cost±benefit analysis must take into account all the factors which influence either the benefits or the cost of a project. if a private electricity board wishes to develop a hydroelectric power station. as far as the private developer is concerned. Imagination must be used to assign monetary values to what at first sight might appear to be intangibles. Perhaps more importantly. the value of recreational facilities. At its heart lies the recognition that no factor should be ignored because it is difficult. in times of high unemployment. Again.

i. 3.5 Engineering risk An essential aspect of project appraisal is the reduction of risk to a level which is acceptable to the investor. recession and boom. from the risks associated with key project elements. but as global risks they are more specifically to do with changes in standards. namely implementation risks and operation risks. The elemental risks are those associated with elements of the project.e. and to facilitate the selection of the most appropriate risk-management strategy. These risks are more likely to be controllable or manageable by the parties to the project. . it could be better or worse than predicted.4. commercial and environmental risk.1±3.6 Risk management The logical process of risk management may be defined as: o o o o identification of risks/uncertainties. Typical examples of these risks are given in Tables 3. Risks arise from uncertainty. response to minimise risk. Global risks may be capable of being influenced by governments. whereas changes in statue law. It is helpful to try to categorise the risks associated with projects both as a guide to identification. regulations and directives would all be legal risks. analysis of the implications (individual and collective). but which may be outside the control of the parties to the project. One method is to separate the more general risks which might influence a project. and in environmental consents. regulation of competition and exclusivity. Environmental risks are easier to identify. For some projects there will also be financial risks and revenue risks. Political risk would include events such as a public inquiry. and are generally interpreted as factors which have an adverse effect on the achievement of the project objectives. legal. management of residual risk. approvals. This process starts with a realistic assessment of all uncertainties associated with the data and predictions generated during appraisal. these are referred to as global and elemental risks. respectively. Many of the uncertainties will involve a possible range of outcomes.Project Appraisal and Risk Management 39 3. in external pressure. and can be sub-divided into four sections: political. Commercial risks can include the wider aspects of demand and supply. social acceptability and consumer resistance.

development costs Design Technology Table 3. design life. operating plant. underestimation of operating costs. operating methods. ground conditions. cost of construction. resources. changes in design during construction. consumables. compatibility with associated facilities. adverse weather conditions. provision for change in existing technology. milestones. design life. construction techniques. construction period. licences Availability of spares. interruption to operation due to damage or neglect. power. supply.1 Implementation risks. availability of information. insolvency Incomplete design. raw materials. failure to complete. plant performance. delay. guarantees. bonds.2 Operational risks. insurances. translation of manuals. damage. Risk category Operation Description Operating conditions. training of principal personnel after transfer Maintenance Training . sufficient time for major maintenance. resources to operate new and existing facilities.40 Engineering Project Management Table 3. distribution of offtake. construction programme. quality. workmanship. calibre and availability of personnel. type of O&M contract. access. physical obstructions Availability of plant and resources. industrial relations. meeting specifications and standards. Risk category Physical Construction Description Natural: pestilence and disease. competition of design New technology. reduced output. warranties Cost and levels of training. type of construction contracts.

ability to meet increase in demand. financial engineering Type and source of loan. shadow tolls. covenants. floating or capped). take-up of shares. discount rates. rate of return. standby loan facility. tariff variation formula. existing debt. ratio of local/base currencies Loan Equity Dividends Currencies Table 3.Project Appraisal and Risk Management Table 3. debt/ equity ratio. changes in interest rate. default by lender. cost of servicing loan. scheduling of payments. demand over concession period. financial instruments Institutional support.3 Financial risks. availability of loan. take and/or pay payments Changes in revenue streams from developments during concession period Toll Developments . toll level. fixed payments. currencies of revenue. demand associated with existing facilities Market-led or contract-led revenue. existing rates Loan period. holding period. type of equity offered Time and amounts of dividend payments Currencies of loan. Risk category Interest Payback Description 41 Type of rate (fixed. Risk category Demand Description Accuracy of demand and growth data. cash-flow milestones. regulated tolls.4 Revenue risks.

. If uncertainty is managed realistically. both internally and on customers and contractors. the process will: o o o o improve project planning by prompting `what if ' questions. allocating additional resources. generates a structured response to risk in terms of alternative plans. encourage the provision of appropriate contingencies and consideration of how they should be managed. give greater confidence in estimates. solutions and contingencies. performing additional tests/simulations. or a changed requirement. is a thinking process requiring imagination and ingenuity. Market risk may frequently be reduced by staging the development of the project. By predicting the consequences of a delayed decision. The use of range estimates will generate a flexible plan in which the allocation of resources and the use of contingencies is regulated. Risk management should impose a discipline on those contributing to the project. generates a realistic (and sometimes different) attitude in project staff by preparing them for risk events rather than letting them be taken by surprise when they arise. appropriate incentives/penalties can be devised. improving communication and managing organisational interfaces. Risk reduction Risk reduction includes: o o o o o obtaining additional information. Risk management: o o o o requires that you accept that uncertainty exists. generate imaginative responses. failure to meet a deadline. All the actions listed above will incur additional cost in the early stages of project development. allocating risk to the party best able to control or manage that risk.42 Engineering Project Management Risk management can be considered as an essential part of a continuous and structured project planning cycle.

they must have confidence in the members of the project or contract team. as described in Chapter 20. Involve staff in risk management in order to utilise their ideas and to generate motivation and commitment. Unwin. Oxford. London. 3. Further Reading Misham. (1998) Managing Risk in Construction. Blackwell Science.A. the Turnbull Report requires all companies to include in their annual statement of accounts a guide showing how risks and opportunities are monitored and managed. This has its own dangers.G. Perry. Thomas Telford.7 Risk and uncertainty management Recently. and cannot easily be integrated at a detailed level for any project.J. This has tended to lead companies to produce simple risk and opportunity matrices. No standard approach has been developed for the industrial application of uncertainty management. This is sometimes known as uncertainty management. The evaluation of both risk and opportunity are affected by uncertainty. requiring a different mind-set and different data. and Thompson. . J. Control is exercised by and through people. but this is another example of the continuing evolution of project management theory and practice. E. constraints and procedures must be clear. The roles. N. much attention has been given to the prospect of considering both the risks and the opportunities associated with a particular project. Smith. In the UK. it is important to note that these are different processes. (1992) Engineering Construction Risks. London. (1988) Cost±Benefit Analysis. However.J. concise and understood by everyone with responsibility. As project managers will need to delegate. and should be an addition to detailed risk-management and value-management studies being undertaken as and when required.Project Appraisal and Risk Management The role of people 43 All the risks described above may be aggravated by the inadequate performance of individuals and organisations contributing to the project. P. with various levels of impact. and ideally should be involved in their selection.

Chapter 4 Project Management and Quality Quality is an important concern for all business organisations. quality can be described as needing the six `C's: o o o confidence control consistency 44 . Quality is the supplying of goods which do not come back. which are usually strongly influenced by a particular industrial sector. suppliers and vendor organisations to operate a quality system. To ensure safety and to limit the consequences of any damage. total quality management is required. o o o o Quality is the ability to meet market and customer expectations. Quality means fitness for use. Most business organisations now require potential partners. 4. needs and requirements. This chapter describes how project management can be used effectively to develop. project managers have used procedures for certain types of projects which can be adopted for the execution and integration of a quality system. Although the management of quality is perceived to be a relatively recent concept. support and administer project-specific quality systems.1 Definitions There are many definitions of quality. the Institute of Quality Assurance was established in 1919. Several definitions are listed below. to customers who do. Quality means in conformance with user requirements. For many years. Essentially.

Quality control (QC) is the process of measuring that a predefined level of performance has been achieved. n involving all personnel in identifying how these two aims could be better achieved. Table 4. The signs are that this trend is increasing. distributors and others providing products and services are increasingly being held responsible for any damage caused by the product to persons or property. performance. This is known as product liability. and those businesses that do not have a quality system will lose business opportunities.1 shows the quality system elements from the ISO 9000 standards and their requirements. Three different stages of quality management are typically encountered. Total quality management (TQM) is a much broader and ambitious process involving: n identifying what (standards. n measuring. In the UK. Currently. n analysing continually how performance can be further improved. requirements) the customer really wants. throughout the total production process. and the International Standards Organisation produced ISO 9000±9004 in 1987. EN29000.Project Management and Quality cost effectiveness commitment communication 45 o o o For the purposes of this chapter. n defining the mission of the organisation. . Quality assurance (QA) defines the procedures and documentation requirements to establish a predetermined level of performance. the quality assurance standard BS5750 was produced in 1979. Organisations achieving the required standards are certified for given periods of time. supplier or vendor organisations to operate a quality system. These documents provide guidance on the preparation and implementation of quality systems. n designing ways in which performance could be approved. There is now a compatible European equivalent. which are given below. most project organisations require potential partner. the author suggests that quality topics should be defined as those currently stated by the Association for Project Management. Suppliers. o o o o Quality is ensuring that required standards of performance are attained. how well performance meets the required standards.

By focusing on the early feasibility and design stages. sometimes until decommissioning.1 Quality assurance. . storage. Management responsibility Quality system Contract review Design control Document control Purchasing Purchaser-supplied products Product identification and traceability Process control Inspection and testing Inspecting. It must be designed so that the emphasis is put on preventive actions. a project manager must pursue an efficient system of coordinating the project activities. The quality system must be adjusted to suit the on-going operation as well as the final product. packaging and delivery Quality records Internal quality audits Training Servicing Statistical techniques 4. ISO 90001. at the same time allowing the project manager to correct any mistakes that do occur during the life-cycle of the project. the customer feels confident about the quality of goods or services supplied and the method by which they are achieved. In order to achieve the desired quality without unnecessary costs.2 Quality systems A project quality system incorporates all stages of the project from conception to operation. the company management knows that quality is achieved in a systematic way. measuring and testing equipment Inspection and test status Control of non-conforming product Corrective action Handling. quality and cost requirements may be identified. The quality system should ensure that: o o o the quality products and services always meet the expressed or implied requirements of the customer.46 Engineering Project Management Table 4.

These must be made known to all members of the company and the project team.2. This interrelationship is shown by the `Deming Circle' in Figure 4.1. Defective products or sections of work must be removed. and handling of.Project Management and Quality The quality system should be based on the following activities: o o o o 47 planning execution checking action All activities and tasks affecting the quality of a project require planning to achieve a satisfactory result.1 The Deming circle. Quality policy is the main guide to the company's approach to quality matters. and each step is described below. Figure 4. The quality policy must not make any statement that will not have the backing and resources necessary for its achievement. quality management. Certain common rules are necessary to coordinate and direct a project's operation in order to achieve the quality objectives. All information gained must be analysed and recorded in order to prevent the same defects from appearing again. Execution should be based on relevant expertise and resources. Continuous upgrading of the quality system must take place. . These rules operate in a hierarchy illustrated in Figure 4. and results must be checked. It clarifies the overall principles if the company's attitude towards. Checking must be followed by action.

48 Engineering Project Management Figure 4. i. departments within the company and members of the project team. Quality principles give more specialised guidelines as to the specific project phases. They distribute the responsibility between different functions.2 The hierarchy of quality procedure. This is done in the form of a quality manual. . and coordinate the construction processes which are important to quality matters. In order to ensure that staff are aware of the methods of working and their responsibilities. Quality procedures define the patterns and sequences of actions to be taken.e. it is essential that principles and procedures are documented.

while serving as a permanent reference in the implementation and maintenance of that system. and the facility for documentation changes. the manual will also fulfil this function. identify the level of activities within the project and the method of work allocation. determine the range of project activities within the specific project. It should provide an adequate description of the quality management system. determine the responsibilities and commitment of the project management team. The structure of documentation within a quality system should take account of structure in order to avoid overlapping and duplication. distribution in order to devise a manageable system that can easily be updated. The quality manual is also used as means to educate new employees by identifying the routines and responsibilities of all other employees within the company or specific to a project. identify the status of existing documentation. The aim of the quality manual is to aid the company and project team in directing their quality management.3 Implementation Implementing a project-specific quality system involves the following actions: o o o o o determine the size of the project. but they concentrate on quality aspects. A documentation system must be able to develop so that it clearly . 4. the project team and its location. design in order to provide a uniform simple format. A tool for this is the quality audit. Quality audits are similar to other in-house audits. and determine whether or not this is compatible with the proposed project activities. It can be directed towards goals (goal audit). and whether these arrangements are implemented effectively and are suitable to achieve the objectives. It is becoming increasingly common for customers to demand proof from suppliers of a documented quality system. A quality audit is a systematic and independent examination to determine whether quality activities and results comply with planned arrangements. systems (system audit) or structure and practicality (operation audit).Project Management and Quality 49 Working instructions give detailed information as to the execution of the various stages of construction related to the project. The company management and the project manager should periodically review the quality actions.

50 Engineering Project Management reflects the activities and methods contained in the project. and with the inclusion of a quality system they should be in a position to control quality as well. capital utilisation should be improved through faster and safer throughput. The following areas must be covered by employees involved in a project: the company introduction package and specific training regarding health and safety at work and the project quality system. safer deliveries and storage of materials. should be carried out prior to any work responsibility being assigned. The advantages to the project manager of developing and introducing a quality system are: o o o o o o that profits would be increased through better management control systems. In this way. The need to identify the costs of achieving quality is not new.4 Quality-related costs The project manager is primarily concerned with controlling time and costs. a monetary value can be placed on wasted effort and on the . quality levels would be uniform throughout the project. satisfied clients and/or promoters. The job description should define the following parameters: designation within the project. 4. and any changes in techniques and procedures. key tasks and responsibilities. costs should be reduced through higher productivity. reference to work instructions. although the practice is not widespread. incurring additional expense and inconvenience. Sections of the system will need to be rapidly updated and reissued to keep abreast of demands. It is recognised that training is one of the cornerstones of a quality system. Certain training is mandatory for employees and. The consequences of failure are costly. Quality costs. and fewer defects and changes. specific performance measurement where applicable. and specified minimum training required. relationship with other members of the project team. but lack of quality costs even more. reporting procedures. wherever practical. both to society as a whole and to the project. Today's society depends heavily on reliable products and services. All members of the project team should have a job description.

the costs of testing. Prevention and appraisal project costs (or investments) o o Prevention costs. .e. n test equipment depreciation. n audits. product service. These include those listed below. n vendor rejects. External assurance quality costs are described below. liability costs). n rework. product recall costs. n fault-finding in tests. n quality engineering. Quality costs can be either operating quality costs or external assurance quality costs.g. i. n scrap and material renovation. n maintenance and calibration. o External assurance quality costs are those relating to the demonstration and proof required by promoters as evidence of work done. Operating costs are those incurred by a project in order to attain and ensure specified quality levels. warranties and returns.e. inspection and examination to assess whether a specified quality is being maintained. n vendor quality planning. n warranties. include: n design reviews. n line-quality engineering. These include: n design changes. n quality and reliability training. n installation testing and commissioning. n commissioning failures. Appraisal costs.Project Management and Quality 51 costs of correcting these errors. and hence the work on the project can be redirected to optimise benefit. n product qualification. n construction and installation prevention activities. i. direct costs and allowances. Failure costs (or losses) o Internal failure costs resulting from a product or a service failing to meet the performance specification prior to delivery (e. the costs of efforts to prevent failures. include: n tests and inspections.

There is a balance between each of these three types of quality cost and their relationship with improvements in quality. n External quality assurance costs should be lower than operating costs since most quality costs will have been incurred before the involvement of external quality assurance personnel. can project managers monitor and control them. . usually at zero cost. In the case of a project-specific quality circle. and their order of magnitude. Secondly. otherwise they become absorbed and concealed in numerous other overheads. They provide a method of refining the local and project working conditions and improving productivity. procedures. The way quality circles work is to set up a small but representative team from one department. 4. Quality costs must be collected and recorded separately. a number of good ideas are identified and proposals made on how the problem may be solved. the best people to fix a problem are those who stand to benefit from its solution. Initially. As would be expected. usually the one that yields the highest benefit. tackle one problem at a time. Second. it must be implemented totally within its own resources. They are based on two factors: o o the staff can often see problems which are not evident to their managers.52 Engineering Project Management including particular and additional quality assurance provisions. There are only two ground rules which must be adhered to if a quality circle is to be successful. the project activity is discussed with other members of the project team. a brainstorming session would be held to determine any attainable improvements in a project activity. Ideally. Thirdly. external assurance personnel should be involved with both the project and the company.5 Quality circles Quality circles originated in Japan. Regular financial reports are vital if there is to be management visibility into qualityrelated costs. the project manager would organise the process. each of the three types of quality cost reduce as quality improves. First. data and documentation. but the largest improvement is in the reduction in the cost of failure. Only by knowing where costs are incurred.

It is also essential that it should be a document which will be read.7 Total quality management (TQM) The steps to total quality management (TQM) are: o o understanding quality commitment to quality . 4. the project manager can utilise the experience of the project team in the quality circle. Usually the problems can be overcome. resources and activities relevant to a particular process. if all the key personnel on a small project are needed to form an effective quality circle it could create problems in actually organising work on the project. methods and work instructions to be applied. other measures necessary to meet objectives. BS 5750. service or project. Their preparation should be started at a very early stage as part of the normal routine of project planning. To ensure that problems are addressed and catered for as they occur. valued and used by those in control of the work. advises that quality plans should define: o o o o o o the quality objects to be attained.Project Management and Quality 53 Finally. the specific procedures. the specific allocation of responsibility and authority during the different phases of the project. inspection. There can be difficulties in administering this scheme. In most projects. quality systems are developed as the project proceeds. the first issue of a quality plan must be made before the commencement of work on site.6 Quality plans A quality plan is a document setting out the specific quality practices. suitable testing. Part 02. the least expensive solution is implemented within the project as a whole. for example. examination and audit programmes at appropriate stages. a method for making changes and modifications to a quality plan as projects proceed. To be of value. 4. but it should be recognised that a significant commitment in terms of time and resources is required if quality circles are to operate efficiently. Many predetermined ideas are often unsuitable for solving particular problems later in the project life-cycle.

every activity of a project contributing to the total quality of a project.3 Total quality management. but a means of achieving it. . techniques and individuals. quality not being an alternative to productivity.54 Engineering Project Management policy on quality organisation for quality measurement of the costs of quality planning for quality design for quality systems for quality capability for quality control of quality teamwork for quality training for quality implementing TQM o o o o o o o o o o o These can be contained in four main elements. Figure 4. The advantages of TQM in a project are: o o quality in meeting the project specification saves money. TQM is a way of managing a project. as shown in Figure 4. The main ingredients of TQM are: o o o o o o quality in meeting the project's requirements. The system is how the other elements are coordinated and enabled to interact. techniques and the quality system. management commitment. teamwork. it alleviates quality costs resulting from poor quality. managing quality involves systems.3. TQM is a way of achieving project success.

as illustrated below. o Goal improvement. When developing a quality system for a project. records can be used to help solve disputes. the system can be implemented easily and quickly. care should be taken to ensure that: o o o o o o the system is appropriate for the project. A quality system is itself a management system which can be used by a project manager to ensure that the project meets the quality required through an efficient management control system.8 Business process re-engineering (BPR) and TQM TQM was adopted by many organisations during the 1980s. the system recognises the need to balance risk. capacity is increased by improving quality. cost and quality of process. process orientation and commitment to improved performance. n BPR: radical. the system allows for changes in the project. documentation is kept to a minimum. 4. sometimes ten-fold levels of improvement in time. the system records all activities in the project. and can be described as continuous process improvement. such as customer focus. there are also a number of differences between the two processes. existing quality systems can be used as the basis of a project-specific system with the addition of control documentation covering activities not previously encountered. many of these organisations began experimenting with more radical change approaches by introducing business process re-engineering. reporting procedures and responsibilities are understood by all members of the project team. . and thus require continuous updating. TQM and BPR share many characteristics. benefit and cost. In the 1990s. n TQM: around 10% improvement in any given year. Many projects are unique and require the development of quality systems specific to that project. quality plans are succinct and helpful. However.Project Management and Quality 55 o o o o o o costs are reduced by preventing poor quality. Many project-specific systems are developed as a project proceeds. the system provides a basis for teamwork and techniques to interact. In many cases.

n BPR: new start with a clean sheet of paper.56 Engineering Project Management Starting point. n TQM: time to establish information systems and an organisational structure. Rigorous measurement of process performance.2 Fundamental differences between TQM and BPR. Investment of time before significant results. Both BPR and TQM are process-orientated. n TQM: cost of quality. o o o o o Table 4. Control measurement. n BPR: attempts to identify the technological or organisational process factors that will maximise variation and create fruitful change. Factors Nature of implementation Main control measure Type of change TQM Bottom-up Cost of quality Evolutionary: a better way of doing a job Culture change Process focus Method Improvement Risk Scope of change Role of technology Functional Adds value to the existing process Incremental (continuous) Moderate Organisation processes Statistical control BPR Top-down Cost of process Revolutionary: a new way of doing business Culture/structural change Cross-functional Redesigns the business process Dramatical High Core business IT enabler . n TQM: the focus is on functional processes. n BPR: cost of process. n TQM: starting from the current state of the process. n BPR: time for training and culture change. n BPR: the focus is on cross-functional processes. n TQM: stresses the rigour of statistical process control to minimise unexplained variation in each process.

S. Further reading Ashford. (1989) The Management of Quality in Construction. Oxford. New York.J. J. BS6143 (1992) Guide to the Economics of Quality. ISO10006 (1997) Quality in Project Management. (1993) Re-engineeering the Corporation: A Manifesto for Business Revolution. . Geneva. Central Unit on Procurement Guidance Note 46. and Champy. Hammer. London. BS5750 (1987) Quality Systems. Oakland. Coulson-Thomas. Quality Assurance. M. British Standard Institution. ISO9000 (1987) Quality Systems. If a quality system is developed without sufficient investigation of the processes involved. London. (1989) Total Quality Management. then it is likely that the system will need major development as the project proceeds. London. International Organization for Standardization. HM Treasury. British Standard Institution. London. E & F.L. Geneva. Nicholas Brealey. Heinemann Professional. C. London. J. HMSO. J. (Editor) (1994) Business Process Re-engineering: Myth and Reality.N. International Organization for Standardization. Spon.Project Management and Quality 57 An on-going polemic regarding the implementation of TQM and BPR is: which comes first? Many project organisations re-engineer processes prior to the introduction of a quality system to ensure that the latest IT enablers are incorporated in the system. Kogan Page.

although this is gradually changing as new methods for valuing environmental impacts emerge and develop. and introduces the basic elements of an environmental management system (EMS). to the outdoor environment of natural woodlands. and therefore today these appraisal methods are supplemented by environmental impact analysis and assessment.1 Environmental impact Before discussing environmental impact. the main tools for project appraisal were cost±benefit analysis and cost-effectiveness analysis. as it can mean a variety of things to different people ± from the light and heat inside a building. to the ozone layer surrounding the planet. It is now recognised that all projects will result in some unquantifiable costs and benefits. were assumed to have such overwhelming benefits that only the costs were assessed in order to determine which of the various alternative methods of achieving the project objectives was the most cost-effective. 5. Developments in the evaluation and `monetizing' of environmental impacts are also reviewed and discussed. the term environment is taken in its widest context to include all the physical. chemical. In the context of the environmental impact of projects. and the discipline of environmental impact assessment. both logical and quantitative methods for identifying whether or not a project was worth implementing or not. Many publicly funded projects. By its nature. This chapter covers the main elements of EIA as it is currently used for the appraisal of projects in many countries. rivers and seas. environmental impact assessment (EIA) requires a much more qualitative approach to project appraisal than cost±benefit analysis. biological and socio-economic factors that 58 . such as water supply systems. moors. it is first necessary to define what is meant by the environment.Chapter 5 Environmental Management In the past.

water. but also man-made artefacts and structures. and can therefore be regarded as permanent or long-term impacts. for example. The range of environmental impacts arising from a project will continue throughout the operating life of the project. water and land. such as the impacts on the environment caused by the manufacture of equipment used for quarrying or cement manufacture. ecology. including air.Environmental Management 59 influence individuals or communities. and to present the information in a manner which is accessible to decision makers so that it can be used in conjunction with other appraisal tools. sound. are not so easily quantified. Lower-order impacts can also be identified. economics and natural resources. Short-term or temporary impacts. while others will have a detrimental effect (costs). Examples include the pollution of the air from the manufacture of the cement used for a project. are those arising from the planning. cultural and economic aspects of human existence. or pollution of the air or water by a factory. the visual impact of a structure. or the importance of preserving an historic building. or the dissolved oxygen concentration in water. It not only includes the air. Some of the impacts will be directly attributable to the project ± such as noise from an airport or road. human aspects. or temporary changes to water-table levels. The purpose of environmental impact assessment is to evaluate these positive and negative effects as objectively as possible. These impacts may affect areas remote from the project itself. all projects have an effect or impact on the environment ± indeed it could be argued that unless they did there would be no point in implementing projects at all. and factors of importance to the social. Some of these may be seen as positive impacts (benefits). and all living species of plants. insects. such as the aesthetic qualities of a landscape or a structure. birds. on the other hand. design and construction phases of the project. Engineering projects may have an impact on the full range of environmental features. Many of these impacts can be measured in terms of changes to specific quality parameters such as the concentration of particulates or hydrocarbons in the air. Typically. Other impacts may arise indirectly through the use of the materials and resources required for the project. These are referred to as direct or primary impacts. these might include the noise and dust generated by the construction process itself. or the impact of quarrying for the raw materials needed for the project. Other impacts. such as cost±benefit analysis. and microorganisms. animals. and are termed the indirect or secondary impacts. In this context. The pollution of the air caused by the operation of a thermal power station is thus an example of a long-term impact. . land.

resulting from a particular action. The process starts with screening. and predict their effects on the natural environment and on human health and well-being. some extremely slowly. The environmental impact is thus any environmental change that occurs over a specified period. in order to help ensure the long-term viability of the earth as an habitable planet. but others at a much faster rate. and within a defined area. and is now often required in order to obtain sanction for a project. temporary and secondary. or permanent and secondary.1. compared with the situation as it would have been if the action had not been undertaken. EIA also seeks to analyse and interpret this information and communicate it succinctly and clearly in the form of an environmental impact statement (EIS). this procedure has now been incorporated in the legal processes of obtaining project and planning approval. permanent and direct. . 5. and. as discussed later in this chapter. The results of the scoping exercise provide the basis and guidelines for the next steps in the process ± the base line study and impact assessment itself. It may be seen as a more specific form of screening. EIA aims to identify and classify project impacts. aimed at establishing the main features and scope of the subsequent environmental studies and analysis. and in other situations it has been used voluntarily as part of general project preparation and evaluation. Therefore any study of the impacts of a project on the environment must be seen in the context of what would have happened if the project had not been implemented. and the effects of projects and policies on the environment. EIA is a process rather than an activity occurring at one moment during the project cycle. Scoping is the second step of the EIA process and is essentially a priority-setting activity. which should be done in the early stages of a project as it is concerned with determining whether or not a detailed EIA is required or necessary. changes occur naturally over time.2 Environmental impact assessment (EIA) Environmental impact assessment (EIA) is a logical method of examining the actions of people. it is necessary to differentiate between these categories of impact within an environmental impact statement. which can be used by decision makers in the appraisal of projects.60 Engineering Project Management Environmental impacts may therefore be temporary and direct. The report of all environmental impacts that are predicted to arise from a particular project is normally termed an EIS. The natural environment is not in a completely steady state. The various steps in the process are shown in Figure 5. In many countries.

The predictions and the base-line study are then used to prepare the report ± the EIS ± which is used in the appraisal and approval processes. it is important that major environmental parameters are . Scoping sets the requirements for the base-line study. Environmental and social scientists will be required for this step. which is the collection of the background information of the ecosystem and the socioeconomic setting of a proposed development project. identify major impacts) Baseline Studies (Define existing environment in terms of important parameters identified in scoping) Impact Prediction (Using models. predictive techniques) Prepare Environmental Impact Statement Monitoring and Audit Figure 5. The activities involve the collection of existing information and the acquisition of new data through field examination and the collection of samples. simulation.Environmental Management Screening (Is an EIS required?) 61 Scoping (Define issues.1 Environmental impact assessment process. Further details of the structure of the report and the more common methods of presenting EIA information are given in subsequent sections of this chapter. Because of the uncertainty associated with environmental impact predictions. as often sophisticated modelling and simulation techniques must be used. The base-line study and the project proposals are then used as the basis for predicting how environmental parameters will change during both the construction and operational phases of the project. This step can be the most expensive step of the EIA because it needs a large number of expert people to carry out field surveys and analysis.

as the impact of a project depends not only on its own specific characteristics. The requirements for an EIA also largely depend on the legislative policy of the country in which the project is to be carried out. whereas the construction of a large coalburning power station would need a full-scale EIA to be done and an EIS to be prepared. . 5. By doing this. the project manager will have to undertake a preliminary study to ascertain the most significant impacts of the project on the environment. a full-scale environmental impact assessment may be required for one site but not for another. and generally improve the accuracy of forecasting models and methods. or if the types of project requiring EIA are not specifically defined. and after studying the environmental law and assessing the political situation of the country. calculations and background information. the construction of a simple building rarely requires an EIA. On the basis of the results of this study. the project manager will have to decide whether a full-scale EIA is needed. Through the screening process. unnecessary expenditure and delay is avoided.3 Screening Screening is the first step of the EIA process: it is the selection of those projects which require an EIA.62 Engineering Project Management monitored throughout the implementation of the project. for any particular project. in different settings. The extent to which the EIA is needed for a project is also defined in this step. For example. only those projects that require an EIA are selected for study. Where there is no appropriate law relating to EIA. which would include the results of the scientific and technical studies required. So. The screening process will depend on whether or not appropriate legislation exists. The process of comparing the impacts predicted in an EIA with those that actually occur after the implementation of the project is referred to as auditing. and where it does the laws will often differentiate between those types of project that need an EIA and those that do not. or a different intensity of some impacts. but also on the nature of the environment in which it is set. supporting documentation. This can provide valuable information for future EIAs. The legislation may also define the extent of the study that will be needed for a particular type of project. Therefore the same type of project can have different impacts.

The projects for which an EIA is mandatory include: o o o o o o o o o o o o o crude oil refineries gasification and liquefaction of coal and shales thermal power stations radioactive waste storage and disposal facilities integrated steel and cast-iron melting works asbestos extraction and processing works production of asbestos products integrated chemical installations motorways and express roads long-distance railways airports with runways longer than 2100 m trading ports and inland waterways. and ports for traffic over 1350 tonnes waste disposal for the incineration.Environmental Management 63 5. land reclamation. phosphates. afforestation. natural gas and ores. and installations for the manufacture of cement. a European Community Council Directive `on the assessment of the effects of certain public and private projects on the environment' was issued. . Australia and Japan. o o Agriculture: for example. coal. extraction of sand. use of uncultivated land for intensive agricultural purposes. gravel. petroleum. but it was not until 1985 that EIA was fully accepted within the European Community. chemical treatment or land fill of toxic and dangerous wastes The categories of project where an EIA is recommended include those listed below. potash. salt. and recommended for other types of project. The Directive called for governments of member states to enact legislation that would make EIA mandatory for certain categories of project.4 Environmental legislation The concept. and eventually the practice. shale. restructuring of rural land holdings. At that time. poultry and pig rearing. This required all member states to implement the recommendations set out in that Directive by July 1988. salmon breeding. Extractive industries: deep drilling. of EIA evolved. water management. The idea was subsequently introduced into other countries such as Canada. developed and was incorporated into legislation in the USA in the 1970s.

Miscellaneous: hotels. aqueducts. brewing. but now issues of pollution control and environmental impact must also be considered. Chemical industries: production of pesticides. waterstorage facilities. manufacture and assembly of motor vehicles. dams. confectionery. race and test tracks for cars and motor cycles. underground railways. flood-relief works. varnishes. Manufacture of glass. slaughter houses. aircraft manufacture and repair. Textile. packing and canning. Food industries: manufacture of oils and fats. harbours. waste disposal installations. starch manufacturing. marinas. cable cars. Processing of metals: iron and steel works. planning procedures only addressed land-use considerations. oil and gas pipelines. Prior to the enactment of the legislation. paint. storage of chemical and petrochemical products. holiday villages. It is worth noting that environmental impact issues must also be addressed in many overseas projects. roads. surface treatment and coating of metals. installations for carrying gas. . hydroelectric installations. o o o o o o o o o In the UK. perhaps more importantly. leather. sugar factories. manufacture of artificial fibres. tramways. dairy product manufacture. overhead cables for electricity. scrap iron storage. peroxides and elastomers. storage of fossil fuels. steam and hot water. pharmaceuticals. production and processing of nuclear fuels and radioactive waste. steam and hot water. and the developer or initiator of a project now has to supply the relevant environmental impact information in order to obtain sanction for the project. these requirements for EIA have been incorporated into the existing planning legislation. due to the fact that bilateral funding agencies (such as the UK's Department for International Development (DfID)) and multilateral funding agencies (such as the World Bank and the Asian Development Bank) now have requirements for EIAs built into their loan and grant approval procedures. knackers' yards. engine test beds. sludge disposal. fish-meal and fish oil factories.64 Engineering Project Management Energy industries: production of electricity. waste-water treatment plants. Rubber industries. manufacture of railway equipment. airports. shipyards. non-ferrous and precious metals installations. either as a result of relevant legislation having been introduced by particular countries or. wood and paper industries. manufacture of explosives. Infrastructure projects: urban and industrial estate development.

Environmental Management 65 5. Local political and environmental concern groups should be consulted at an early stage to avoid unnecessary confrontation at a later stage. effect on life styles). There are two major steps to take in seeking public opinion. the effect on other forms of life. economic criteria (the value of resources. it is extremely important to solicit local public opinion about the project and its perceived impacts on the environment. the effect on commerce). The base-line study and the impact assessment are expensive and timeconsuming.5 Scoping The US National Environmental Protection Agency (NEPA) Council on Environmental Quality defined scoping as `an early and open process for determining the scope of issues to be addressed and for identifying the significant issues related to a proposed action'. Very often this depends on the latest developments in the science and technology of environmental monitoring and prediction. and this will vary with the environment surrounding the project. the first of which is to identify the population/target groups affected and attempt to obtain their opinions. Scoping is therefore intended to identify the type of data to be collected. The other main task is that of determining which are the most important impacts that may occur. This is best done at the scoping stage. and the determination of the impacts of a proposed project or policy depends on the current state of knowledge relating to any particular aspect of the environment. and the way in which the results of the EIA should be presented. It is likely to involve value judgements based on social criteria (aesthetics. human health and safety. and requires judgement. recreation. This is one of the tasks of the scoping exercise. but also of the social. As it is the people living in or near the area of a proposed project who are most likely to have detailed local knowledge and to be most concerned about the local environment. tact and an understanding not only of the technical issues. the effect on future generations). The question of what is a significant impact is not always an easy one to answer. the methods and techniques to be used. the effect on employment. It is therefore important to ascertain what can reasonably be carried out within the time and budget allowed in order that best use can be made of available resources. as well as the professional experience and judgement of those who carry out the EIA. cultural and economic ones. or ethical and moral criteria (the effect on other humans. In order to carry out this public consultation exercise. a schedule of meetings with the population and target groups affected . as local knowledge is a valuable source of data for the base-line studies.

a great deal of time and money can be . 5. The advantage of scoping is that it helps to obtain advance agreement on the important issues to be considered in the following activities of the EIA. using competent staff and providing adequate resources. This opinion and data collection procedure is quite a time. Sufficient time should be allowed for these meetings. Care should be taken to ensure that all affected and interested groups are included in the programme. it may be possible to carry out some of these surveys by telephone. Like good early project planning. The panel will collect public views through written comment.6 Base-line study The scoping exercise should provide information about which data are required and which data are unnecessary. and all suggestions and comments should be recorded in meeting minutes and made public.and money-consuming activity. and helps to use scarce resources efficiently in order to analyse the impacts while preventing unnecessary investigation into the issues/ impacts which have little importance. A method used in Canada to ensure the public's involvement is to use a panel of four to six experts. In such cases. If this information is not provided by the scoping team. so that meetings with the people affected and other interested groups can become very difficult. the objectives. The panel is then responsible for issuing guidelines for preparing the EIS and reviewing it after completion. sample questionnaire surveys can be carried out and. and requires patience and diplomacy. who are selected to examine the environmental and related implications of a particular project. including a structure for the base-line study. At these consultation meetings. Good scoping requires planning. workshops or public meetings before completing the guidelines for the EIS. and to suggest mitigation measures. scoping can save enormous expense and time during the later and most costly steps of EIA.66 Engineering Project Management needs to be arranged. and everyone should be encouraged to express their opinions on the project and its possible impacts. if not impossible. The outcome of a scoping exercise should be a list of priority concerns and guidelines for the preparation of the EIS. probable results may be formulated. using statistical methods. Where appropriate. In many cases. Major impacts and areas of concern may be identified from this public consultation exercise. possible impacts and activities associated with the project should be explained. the EIA has to be completed in a very short period of time.

The base-line study should result in a description of the existing environment. and one should be selective in the information used to describe the base-line. and other sources such as the monitoring and evaluation data from similar completed projects. As the impacts of the proposed project on the environment are forecast on the basis of the data collected during the base-line study. modelling and simulation techniques. the focus of the base-line survey has been on what is available rather than on what is needed. which should have been identified during the scoping stage. Some of this will be available from previous studies or other sources. but it may be necessary to conduct extensive monitoring exercises to gather other necessary data. The outcome of the base-line study is a form of environmental inventory based on primary environmental data collection where appropriate. secondary and short. The information should be relevant to the impacts discussed. changes will occur even without the proposed project. the opinions of pre-selected individuals and groups. Too often. there is no need to spend a great deal of time and energy on data collection and descriptions of present and future noise levels if the project is very unlikely to generate any additional noise. primary.and long-term effects. Unfortunately there are a large number of examples of EIA base-line studies which have included a lot of fairly irrelevant material simply because those preparing them have included all the data that were available. and it should be remembered that this is not static. These parameters may be grouped into various categories such as biological. 5. economic and cultural. the consequences or impacts should be predicted using the most appropriate methods. The base-line description should be confined to those impacts and parameters that matter. and differentiate between. . it is important that the study is carried out accurately and thoroughly. which may include predictive equations. The predictions should include. There should be an attempt to show the effect of all project activities on a comprehensive range of environmental parameters. The thing to avoid is the costly gathering of data that are of little or no importance. even if they were unnecessary. For example. physical. social. and wherever possible quantitative predictions should be made.Environmental Management 67 wasted in gathering irrelevant and unnecessary data. The base-line study should concentrate on gathering the important data as identified in the scoping exercise.7 Impact prediction For each alternative.

giving details of the use of land. indicating the levels of important environmental parameters. quantitatively wherever possible. and reasons given for their rejection. A list and description of all reasonable and possible project alternatives. This section provides the scientific and technical evidence on which comparisons between the alternatives can be made. including the `do nothing' option. Some assessment of the accuracy of predictions could be included. The base-line study report: a comprehensive description of the existing environment. and estimates of expected levels of pollution and emissions. 5. flora. including predictions of the effects of all the significant impacts on human health and welfare. landscape and cultural heritage. as well as any irreversible environmental consequences and irretrievable use of natural resources. making a precise prediction of the value of the particulate concentration will almost certainly suffer from inaccuracies. the following details should be included. fauna. an imprecise prediction such as `the levels of particulate concentration in the air in the immediate vicinity will increase' is likely to be very accurate. n A clear description of the project during construction and operation. climate.68 Engineering Project Management Decision makers need to address the question of the accuracy of these predictions ± imprecise predictions can generally be counted on to be fairly accurate. n The severity of each impact and a clear description of the methods used for measuring and predicting it. n A clear estimate of the environmental consequences of each alternative. For each of the main alternatives. whereas there is often a degree of uncertainty associated with precise forecasts. The report should clearly draw the reader's attention to any serious adverse impacts that cannot be avoided or mitigated. For example.8 Environmental impact statement The EIS itself is a detailed written report on the impact of the project on the environment and should contain the following points. However. . if a power station is being considered. water. Even options that might be considered `non-viable' should be mentioned. land. o o o The need for the project: a description of the aims and objectives of the project. air. materials and energy. explaining clearly why the project is required.

The statement conclusions should indicate the preferred option and describe any mitigation measures that may be required to minimise the environmental impacts of this option. yet readily understood by decision makers. overlay mapping techniques. as discussed later in this chapter. and because of their critical importance within the EIS. A list of environmental factors and development actions. o o Simple lists. Check-lists Check-lists are one of the oldest types of EIA method and are still in use in many different forms. Descriptive check-lists. multi-attribute utility theory and matrix methods. This type of check-list gives some guidance on the assessment of impacts. and to ensure that a particular factor is not omitted in the EIS. although it does not attempt to determine the relative importance of those impacts. and it may often be the first section to be referred to. These include a number of different forms of check-lists. Many consider this to be the most important section of an EIS. Five types of check-list are commonly in use. possibly in tabular or other easily readable form. The principal use of this method is to focus attention. they are often referred to as EIA `methods'. 5. or a more complex list of variations that incorporate the weighting of impacts.9 Presenting EIA information One of the difficult tasks in preparing an EIS is that of presenting the information in a way that is comprehensive. Sometimes a list of project actions that may cause impacts is also incorporated. with no guidance on the assessment of the impacts of the project on these factors. . networks. A non-technical summary should be included.Environmental Management 69 o o o o The environmental consequences of each alternative should be compared. Check-lists may be a simple list of items. A number of commonly accepted ways of doing this have emerged. This is particularly true of comparisons of the severity of the impacts of alternative proposals. Check-lists usually consist of lists (prepared by experts) of environmental features that may be affected by the project activities. The report should include an index and any necessary appendices for detailed calculations and data analyses. as it provides an easily understood comparison of all alternatives and their main environmental consequences.

It attempts to recognize a series of impacts that may be triggered by the project. the user can identify impacts by selecting the appropriate project actions. for example. ecological. Networks and systems diagrams These methods were developed as a way of differentiating secondary. by using computers.g. A panel of experts decides on the weight to be assigned to each environmental parameter. This method is suitable for the selection of routes for new highways or electrical transmission lines. In the case of systems diagrams. and to provide an overall environmental impact score for each alternative. Scaling±weighting check-lists. Questionnaire check-lists. physical. and a number of computer packages have been developed for this purpose. One of the main difficulties of using this method is that of superimposing all the maps in a comprehensive way. these problems can be overcome. These consist of a list of environmental elements or resources. accompanied by criteria for expressing their relative value. However. and different intensities of impact are indicated on the maps by different intensities of shading. For each alternative being assessed. and then establishes cause± condition±effect relationships. This type of check-list consists of a series of direct linked questions which are posed to a variety of professionals. who are asked to respond yes. . the appropriate criteria are selected and any impact that exceeds the defined limit is considered to be significant and should be highlighted for the decision makers' attention. A composite characterization of the regional environment is produced by overlaying these maps. The methodology starts from a list of project activities. no or unknown to each of the questions. The idea is to assign a weighted score or scale to each possible impact to enable one impact to be compared with another. especially when the number of maps is large. social. By defining a set of possible networks. aesthetic) of the proposed project area.70 Engineering Project Management Scaling check-lists. these effects are quantified in terms of energy flows. o o o Overlay mapping This procedure consists of producing a set of transparent maps showing the environmental characteristics (e. tertiary and higher-order impacts from the initial impact.

The methodology follows the steps described below. for each of the alternatives is then calculated. (2) (3) (4) . Establish the desirability or otherwise of different levels of each parameter. time-consuming and requires periodic updating.Environmental Management 71 The advantage of this approach is that it can show the interdependency of parameters. The utility Ui (xi) of each parameter xi is measured on a scale of 0±1. where 0 is the lowest utility (i. or a composite environmental quality index (EQI). which is often very difficult to characterise. The steps described above have to be carried out for each of the alternatives separately. (1) Determine the environmental parameters that may be affected and can be measured. The limitations are that it is only really suitable for the assessment of ecological impacts. These methods provide a logical basis for comparing the impacts of alternatives to aid in decision making. Multi-attribute utility theory Utility theory in EIA has been applied most often to site selection. n EQI ˆ U…x† ˆ 3 ki Ui …xi † … 5: 1† iˆ1 where ki is the scaling factor of parameter xi. Determine a scaling value for each of the environmental parameters which will reflect the relative importance as perceived by decision makers. and formulate the utility function through a systematic comparison of those different levels. as shown below. Again the scaling factors are highly subjective and value-laden. especially for projects such as major power stations and waste disposal facilities. and the effects of changes in one parameter on other parameters.e. the worst possible situation) and 1 is the highest utility (the best possible situation). Alternative projects have different environmental impacts and exhibit different levels (intensity) of the same impact. knowledge and experience of `experts'. Ui (xi) is the utility function of parameter xi and U(x) is a multi-attribute utility function. For each parameter. use appropriate prediction methods to estimate the value of each parameter after the proposed project has been implemented. and the total utility. This step is highly subjective and relies on the values. Systems diagrams depend on a knowledge of the ecological relationships in terms of energy flow. This is denoted by ki. and it is expensive.

because it is easy for the decision maker to compare one alternative with another. The fact that a single number. because it produces what appears to be an objective numerical comparison. Others see this as a major drawback. Various modifications have been made to Leopold's original lists of activities and environmental characteristics to suit particular situations. One of the advantages of this method is that the concepts of probability and sensitivity analysis can be incorporated into it. and that they are fully dependent on the probability assumptions. which is not the case. A simple two-dimensional matrix is. in effect. Matrix methods were originally proposed and developed by Leopold et al. (1971) of the US Geological Survey. This will be the least environmentally damaging and the best of the alternatives. Another criticism of the method is that it militates against public understanding and involvement by being unnecessarily technocratic and complex. Simple interaction matrix . is produced is seen by some as an advantage. Finally.72 Engineering Project Management (5) Determine which alternative has scored the highest EQI value. and by using computers a number of `what if ' scenarios can be examined. Their matrix. the cause± effect relationships of actions and impacts can easily be identified by marking the relevant cells. the EQI. to identify the impacts on the environment of almost any type of construction project. but which is in fact based on hidden subjective assessments of the utility factors and the scaling factors. Matrices This form of matrix is simply a two-dimensional chart showing a checklist of project activities on one axis and a checklist of environmental parameters on the other axis. Those activities of the project that are judged by experts to have a probable impact on any component of the environment are identified by placing an X in the corresponding intersecting cell. a combination of two check-lists. a further limitation of this methodology is that it assumes that the environmental parameters are independent of each other. It incorporates a check-list of project activities on one axis and a check-list of environmental characteristics which may be affected by the actions of project on the other axis. now known as the Leopold matrix. From the matrix. consists of 100 specified actions of the project along the horizontal axis and 88 environmental parameters along the vertical axis.

During the scoping stage. is used to express the magnitude and importance of the impacts in each cell. Another major advantage of the matrix method is that it can communicate the results to the decision makers as a summary of the EIA process. and it can express the magnitude and importance in both qualitative and quantitative forms. another grading system was suggested which incorporated the relative weights of each development activity. except that the predicted project impacts are unlikely to occur.10 Monitoring and auditing of environmental impacts Monitoring Environmental impact assessment is largely concerned with making predictions about the effects projects will have on the environment. the . or to develop improved methods of prediction. and if so to determine its magnitude or severity. and are compared with those predicted. This should outline which parameters to monitor. and continue throughout the construction and operational phases of the project. ranging from 1 to 10. 5. The reference site should be as similar as possible to the project site. and is not caused by some other factor or natural cause. which should be monitored as well as the project site. The monitoring of environmental impacts is thus an essential component of the EIA process. and can be modified as required. it is not possible to assess the accuracy of predictions. In order to do this. In 1980. Modifications of these matrices have been going on over time with the advancement of EIA. This method can identify major activities and areas that need more attention. Unless the actual impacts are measured and monitored during and after project implementation. Thus. and second to establish whether or not it is actually the result of the project. a grading system is used in place of the simple X. To be effective.Environmental Management 73 Quantified and graded matrix The original Leopold matrix is slightly more complex in that a number. it is desirable to identify `control' or `reference' sites. monitoring should begin during the base-line study. It can be used for any type of project. The advantages of a matrix are that it can rapidly identify the cause± effect relationships between impacts and project activities. The aim of monitoring is first to detect whether an impact has occurred or not. a framework for monitoring should be established.

thus improving future EIA studies. it is worth noting that monitoring data can provide an early warning of possibly harmful effects in time to initiate mitigating measures and thus minimise adverse impacts. the environmental effects are given much less attention. and of these. Monitoring improves general knowledge about the environmental effects of different types of projects on a variety of environment parameters. Auditing not only helps to provide information on the accuracy of environmental impact predictions. Whilst the main objective of monitoring is to assess the validity and accuracy of predictions (auditing). as explained above. the fact that design changes had been made after the EIS had been completed. and once this has been granted. These included inappropriate forms of prediction. less than 50% were shown to be accurate. Auditing Auditing is the process of comparing the predicted impacts with those that actually occur during and after project implementation. If EIA is to be used as a method of reducing environmental impacts and/or mitigating against them. the magnitude of change of each parameter that is statistically significant. and the probability levels of changes occurring naturally. Auditing and monitoring are steps in the EIA process that are often disregarded or not given sufficient attention. Audit studies of EIAs produced in the past have shown considerable variation and inaccuracies in environmental parameter predictions. There is therefore great room for improvement in the preparation and presentation of EISs.74 Engineering Project Management required frequency of sampling. the data available will increase and become more reliable. . As more monitoring exercises are carried out. the auditing process must be given a much higher priority than is currently the case. and effective monitoring and auditing are absolutely essential if these improvements are to be made. Auditing thus requires accurate and well-planned monitoring. but also highlights the best practice for the preparation of future EISs. as there is little point in spending a great deal of time and money in gathering irrelevant or insignificant data. In some cases less than 10% of the impacts evaluated in an EIA could be audited. The monitoring process can be very expensive. and inadequate or non-existent monitoring. One of the reasons for this is that EIA is seen by many as a hurdle in the approval and sanction phase of a project. The establishment of this framework is perhaps more important than the actual details relating to data measurement and collection. and a large number of impacts studied could not be audited for a variety of reasons.

This simple example illustrates that environmental `goods' are not free.e. and the second being how they can be valued in the same terms as other project costs and benefits: i. However. There are two questions to address.e. but they are written and presented in different terms and forms. the CBA equation could be rewritten as 3…Bt À Ct Æ Et †…1 ‡ r†Àt > 0 … 5: 3† where Et is the environmental change (cost or benefit) at time t. the principles of CBA can be expressed by the following equation: 3…Bt À Ct †…1 ‡ r†Àt > 0 … 5: 2† where Bt is the benefits accruing at time t. For this reason. which helps to coordinate these two appraisal tools and perhaps eventually to combine them.11 Environmental economics Decision makers are often faced with two documents: the mainly qualitative report on environmental effects (the EIS). the first being whether or not there are indeed any real costs and benefits that can be ascribed to the environment. Whenever they are used.Environmental Management 75 5. a relatively new science of environmental economics has developed. Both are concerned with costs and benefits. or a reduction in health or welfare. as a direct consequence. the loss of income suffered by the community. and the `objective' numerical statement of costs and benefits (the cost±benefit appraisal). To address the first question. If a factory sited upstream then discharges waste directly into the river. as a consequence of . in money terms. either as a resource or as a waste depository. whether that be in terms of loss of income. only those costs and benefits that can easily be quantified are normally included. Cost±benefit analysis (CBA) In its simplest form. and the environmental and social costs and benefits are ignored. r is the discount rate and t is the time. the likelihood is that the fish population in the river will be affected and. the livelihood and welfare of the fishing community downstream will decline. there is clearly a cost associated with the pollution of the environment: i. they do incur some form of cost. consider the situation where a community relies on catching fish from an unpolluted river for its income. If both these questions can be answered satisfactorily. Ct is the costs incurred at time t. In this instance.

and they increase or decrease their welfare in much the same way as other commodities. or the provision of electricity. For example. But how can environmental costs and benefits be measured in money terms. and this refers to those benefits directly derived by people who actually make use of the environment and gain direct benefit. high noise levels. polluted land or water. The second form of environmental value is option use value. even if they see no probability that they will ever make use of that environmental asset. environmental economists have been developing new approaches to valuing the environment. such as farmers. Polluters also derive a benefit from the environment as a consequence of being able freely to dispose of their waste. they may want to use it in the future. some people place a value on the environment for its mere existence. place a value on the rainforests. Methods for valuing the environment The main methods that have been developed for `monetizing' environmental costs and benefits are: .76 Engineering Project Management air pollution. or the preservation of certain endangered species. and many of these techniques can now be used to incorporate environmental costs and benefits in traditional cost±benefit analyses. Environmental values Environmental economists ascribe three distinct forms of value to the environment. The total economic value of an environmental asset is equal to actual use value plus the option use value plus the existence value. which is the value that some people put on the environment in order to preserve it for future use. how can they be `monetized'? Over the last few years. a washing machine. these things do have value to people. they may believe that a particular area of scenic beauty is worth preserving because. This is the existence value of the environment. In addition to this. Some people. affect the quality of people's lives. either by themselves or by future generations. such as a new car. for example. or in a number of other ways. The only reason that these costs are not always evaluated is because there is no market for environmental goods ± we cannot buy clean air or quiet surroundings. Nevertheless. even though there is no possibility of those people ever seeing them. The first of these is what is termed actual use value. at least not directly. fishermen and hikers. even if they do not use it now.

the net benefit may be reduced. or to restore the environment after it has been degraded. this technique is probably the most widely used environmental valuation method. if not impossible. as described previously. For example. changes in market prices for goods and services must also be considered. could be used as the environmental cost of the project. Despite the difficulties mentioned above. of course. the cost of additional fertilizers. the monetary value associated with the changes must be calculated. It is often very difficult to establish the physical link between the affected environment and the change in output: for example. The procedure for quantifying the effect on production is a two-stage process. . and second. and it is often an extremely complex task to disentangle the various factors contributing to a loss in production. There may be other causes. these costs are real and actually become part of the project cost. an example of this method might be the reduction in fish catches due to pollution of a watercourse. to establish the relationship between the effect of fertilizers used in an upland catchment area of a lake on diminishing fish stocks in the lake. the link between the environmental impact and the amount of lost production must be established. which are used to compensate for the loss of natural fertility in the soil arising from a particular project. For example. Similarly. if increased production saturates the market and prices then fall. First. particularly when trying to separate man-made from natural effects. Preventative expenditure and replacement cost This method assesses the value placed on the current environment in terms of what people will spend to preserve it or stop its degradation (defensive expenditure).Environmental Management the effect on production methods preventative expenditure and replacement cost human capital hedonic methods the travel cost method (TCM) contingent valuation 77 o o o o o o The effect on production methods In its simplest form. In some cases. This is particularly difficult. Determining the effect requires a `with' and `without' scenario to be established. when project actions have already been initiated. However. the cost of installing double glazing in houses affected by noise from a road or airport can be regarded as the minimum cost of this form of environmental pollution arising from the project. as these will influence the net cost or benefit.

even if the preventative measures are not taken. polluted air or a wide variety of other factors. such as the proximity to schools and transportation routes. The method thus requires large amounts of data. People are prepared to pay more money for a house located in a quiet area with a pleasant view. which are then very difficult to analyse.78 Engineering Project Management However. the environmental cost of the pollution could be calculated by assessing the loss of earnings of those people affected. The method suffers from the problem that it is often very difficult to isolate a single cause of productivity loss. than they would for essentially the same house located next to a noisy. The housing market can therefore be used as a `surrogate market' for the environment. using techniques such as multiple regression analysis. and these factors must be isolated and removed. it has been used . if the method is to prove in any way reliable. For example. the price of a three-bedroom semi-detached property will vary according to the environment in which it is located. This method considers people as economic units and their income as a return on investment. dirty factory. Human capital Hedonic methods These methods use surrogate prices for environmental `goods' for which there are no direct markets. This is often done by estimating the cost of a shadow or compensating project. However. of course. if a direct causal link with a particular environmental pollutant can be proven. An example of this might be the drilling of boreholes and the establishment of an irrigation system for people displaced by a dam project from a village that had good natural irrigation to an area where crop irrigation is problematic. there is a cost to those affected and it should be given consideration in the appraisal of the project. and the additional costs of medical care required. For example. There are. It focuses on the increased incidence of disease and poor health. poor domestic hygiene. Although relevant statistics may be available in developed countries. it is unlikely that the method could be used in many developing countries. poor health may be caused by unclean water. many other factors that affect house prices. which would be required to bring the environment to the same quality as it was before the main project. and the consequent cost to society in terms of increased health care costs and reduced potential for earnings by the individuals affected. owing to the lack of records and inadequate information. They seek to link environmental goods with other commodities that do have a market value. However.

and how often they visit the site. and many international funding agencies now require an EIS as part of their loan or grant approval procedures. The future EIA is now a recognised and accepted practice. The results of the survey. This technique may be used on its own or in conjunction with the other techniques described above. how long the journey took. it is essential that it is seen not just as a means to obtain a permit to develop. incur higher fares and spend more hours in transit to and from the site. The technique usually involves questionnaires being sent to the parties concerned or house-to-house interviews. what type of transport they used. are used to determine an annual total cost incurred by all visitors to the site. Visitors are asked how far they have travelled. but as an environmental management tool to be used throughout the life . This method is mainly used to determine the value of preserving national parks and other sites of scenic. recreational and scientific interest. The further people travel to the site. and how much they would need to be paid (`willingness to accept'. whether they visited any other locations. If EIA is to continue to develop and to maintain credibility. WTP) for a certain environment benefit. WTA) in compensation for losing a certain environment benefit. together with information on the total number of visitors to the site each year. and is used widely in appraising projects. Surveys must be carried out at the site in question. It is assumed that this cost must be a minimum value that is placed on the amenity. Contingent valuation method The contingent valuation method is a technique that can be used where actual market data are lacking. as they will use more fuel. how much they are willing to pay (`willingness to pay'. The value of the site is calculated as the cost incurred by the visitors in both travelling expenses and time spent travelling. The method involves asking people what their preferences are. Travel cost method This method is particularly appropriate for valuing recreational areas with no or low admission charges.Environmental Management 79 successfully to evaluate the costs of noise and air pollution on residential environments. In most countries it is now incorporated into the legislation relating to planning and approval. the greater value they place on it. primarily at the sanction stage.

construction. EIA is not the only `tool' or process that can be used for environmental management. EIA is still used primarily at the feasibility. into our cost±benefit appraisal calculations. However. appraisal and sanction stages of the project cycle. is the environmental management system. Specification for Environmental . it must be seen by project managers. the purpose of which is to provide managers and other decision makers with clear guidelines on how to improve an organisation's environmental performance. This will only come about if monitoring and auditing are conscientiously carried out. construction. and the results are fed back into the EIA process. social and environmental costs can only be estimated within certain limits of confidence. The idea of the EMS was first formally recognised and given authority by the publication in 1992 of British Standard BS 7750. 5.80 Engineering Project Management of the project: from inception to design. and as such it includes strategic planning. such as monitoring and auditing. or EMS. Although some elements of EIA. an EMS bears a lot more resemblance to a quality management system than to an EIS.12 Environmental management Environmental management is not separate from project management. rather than discrete values. operation and decommissioning. as with direct costs. should be an integral part of the design. and one that has recently risen to prominence throughout the world. but even the direct costs of design and construction cannot be predicted accurately. The way ahead is to recognise that. In this sense. The valuation of environmental impacts is likely to improve as more data are gathered and confidence in the methods grows. and in a wide range of industries. The sceptics point to inaccuracies associated with the monetary evaluation of environmental impacts. operation and decommissioning phases of a project. in every aspect of the work they do (which may include carrying out projects). and to build these ranges. design engineers and constructors as an integral part of their work at all stages of the project cycle. an EMS is an action tool. An EMS is part of an organisation's overall management system. It is already possible to incorporate some environmental impacts as costs and benefits in conventional cost±benefit analysis. Whereas EIA is an analysis and appraisal tool that enables decision makers to predict the environmental impacts of a project. organisational structure and the implementation of an organisation's environmental policy as an integrated part of the organisation's activities.

be capable of adapting to change. This was superseded first in 1994 by a new version of BS 7750. The underlying purpose of ISO 14 001 is that companies will improve their environmental performance by implementing an EMS. The ISO 14 001 standard requires a company or organisation to establish and maintain a system that enables it to: o o o o o o o o establish an environmental policy. as a consequence. Environmental policy The first step in implementing an EMS is to gain a commitment to environmental improvement from top-level management. facilitate planning. it is not a performance or product standard. there is no legal requirement for a company or organisation to set up an EMS. review and audit. Like a quality management system. control. identify the environmental aspects of their operations. monitoring. Thus. one of the ISO 14 000 family of documents on environmental management. It should be stressed that whereas EIA is now a legal requirement for certain types of project in most countries. Figure 5. risks and opportunities in relation to environmental issues and effects should then be undertaken. it is becoming more and more common for major clients to require their contractors to have an EMS and. but there are no standards for performance or for the level of improvement. The review should cover all legislative and regulatory requirements and an . However. A preliminary review of all aspects of the organisation in the light of strengths.Environmental Management 81 Management Systems.2 illustrates the various steps necessary to set up an EMS for an organisation. an EMS is a management standard. and this must then be made public by issuing a corporate environmental policy statement. the spread of the use of the EMS is being driven by the supply chain rather than by legislation. It is a process for managing company activities that impact on the environment. determine the significant environmental impacts. identify relevant laws and regulations. weaknesses. and again in 1996 by the international standard EN ISO 14 001. for contractors to require their sub-contractors and suppliers to have one also. establish a structure and programme to implement objectives. set environmental objectives and targets.

Planning ISO 14 001 requires an organisation to set up and maintain programmes and procedures to identify any environmental effects arising from the support functions (planning. and an examination of existing environmental management procedures. This review sets the base-line for the organisation's environmental policy. and to show a continuing commitment to an improvement in environmental performance over and above that required by the legislation.82 Engineering Project Management Figure 5. the organisation must set these targets itself. procurement) of the . sales. together with an evaluation of known significant environmental impacts of the organisation's activities. the policy must contain a commitment at least to meet all relevant environmental legislation.2 The steps needed to set up an EMS (after ISO 14 001). It must also be made public. These are the essential requirements for meeting the standard. In order to meet the ISO 14 001 standard. finance. assessment of previous non-compliance. It should be noted that the standard does not require an organisation to meet externally set targets for environmental performance (other than minimum legal requirements).

A major element of planning is the setting of objectives and targets. it can be integrated with other management systems such as quality. and specify the means and time frame by which they will be achieved. The documentation for the EMS need not be a separate manual. the necessary resources must be provided. For example. These programmes will formally assign responsibilities. organisations must implement procedures for internal communication between the various levels and functions of the organisation. to this end. they must be documented. such as the release of pollutants into the environment. and health and safety. and for dealing with relevant communications from external parties such as suppliers. The plan should also include procedures for identifying and ensuring access to relevant environmental legislation and regulations. These must be consistent with the organisation's policy. implemented and maintained. Once objectives have been set. Implementation and operation In order to implement the programme. and communicated to. or indirect.Environmental Management 83 organisation as well as the main activities. all levels of the organisation. which may include the possible misuse of the company's products by others. individuals need to be nominated to ensure that the organisation is kept up-to-date with all relevant environmental legislation and for training at all levels within the organisation. A management representative must be appointed to ensure that the EMS is established. subcontractors. environmental groups. The important thing is that it is easily available to all employees and. In addition. To conform to the requirements of the standard. it may be in paper or electronic format. or the environmental impacts arising from the activities of suppliers and sub-contractors. that can have a significant impact on the environment need to be identified and then controlled and monitored to ensure compliance with legislation and the organisation's EMS. Operations and activities. programmes to achieve them must be developed and documented. including maintenance. Wherever possible they should quantify the targeted levels of improvement in environmental performance. and these must be fully detailed in the plans. `We will reduce hazardous waste emissions by 50% of current levels within the next 12 months'. and they need to be developed for. The organisation should also identify any . public organisations and the general public. as appropriate to any given situation. These effects may be direct.

all of which may be required due to changes in legislation. must be used in order to gain formal accreditation to ISO 14 001. Checking and corrective action The characteristics of operations and activities that can have a significant impact on the environment need to be monitored and measured regularly. and to show that objectives and targets are being met. verified by the appropriate agency. Actions to be taken in the case of non-conformance should be detailed in the EMS. The results of any monitoring should then be compared with the legislative and regulatory requirements in order to demonstrate compliance. they must have the support and authority to obtain the necessary information. modifications to business operations. Although an internal auditor may conduct audits. . which is conducted by senior management to ensure that the system is operating effectively. For each environmentally relevant activity. which aspects of the organisation's activities will be audited. The EMS itself must also be subjected to systematic and regular audit in order to provide assurance that the system is being implemented satisfactorily. who will be responsible for the auditing. and the procedural changes implemented as a result. This provides the opportunity to make any changes to policies. or for continual improvement. together with the reasons for non-conformance. an external auditor. and how the results will be documented and communicated. advances in technology. the organisation should document how verification is to be carried out and the required accuracy of the measurements. and communicate the relevant procedures and requirements to its suppliers and contractors. Management review The EMS cycle is concluded by the management review. to demonstrate that operational controls are effective. and to provide information for the management review. Records of monitoring and measurement are needed to assess performance. results of audits.84 Engineering Project Management significant environmental impacts associated with the goods and services that it uses. Methods for preventing or mitigating environmental impacts associated with emergencies should also be developed and documented. Procedures for audit need to be established to identify the frequency of audits. objectives or the EMS itself. Whether internal or external auditors are used.

London. Turner. Harvester Wheatsheaf. F. Oxford. . P. London. Butterworth. Roberts. and Bateman. Hemel Hempstead. (1998) ISO 14 001. Geneva. D.. (Editor) (1988) Environmental Impact Assessment: Theory and Practice.J. Clark.T. USA. Pearce. Department of Interior. McGraw Hill. (1999) ISO 14 000. London.B. Winpenny. J.E. R. EMS Implementation Handbook. Environmental Management Systems: Specifications and Guidance for Use. A. and Balsley. Hanshaw. G. C. (1971) A procedure for evaluating environmental impact. J.. and Robinson. D. (1992) Environmental Law. Hughes.R. (1994) Environmental Economics: An Elementary Introduction. Essex.B. H. Further reading Harrington. L.K. B. Wood.Environmental Management 85 Reference Leopold. I. Butterworth Heinemann. ISO (1996) ISO 14 001. Implementation: Upgrading your EMS Effectively. and Knight. Longman. H. (1991) Values for the Environment: A Guide to Economic Appraisal. New York. (1995) Environmental Impact Assessment: A Comparative Review. Unwin Hyman. US Geological Survey Circular 645. International Organization for Standardization.. 2nd edn. Wathern. HMSO.

6. for major infrastructure projects. The cost of finance and its associated components are often determined by the method of revenue generation.Chapter 6 Project Finance In this chapter the sources of finance. in conjunction with loans from the private sector. has resulted in private finance being considered for a number of major projects normally procured with public funds. transport systems. the type of project and its location. resulting in a hybrid. 86 . methods of project financing. types of loan. has been sufficient to ensure that projects have been completed that would not have been commercially viable without such support. The fact that no money is free. government support to lenders of project finance. loans in a mixture of currencies. even to governments who borrow from the private sector and bear the costs of collecting monies themselves. in the form of guarantees. In many cases. mixed funding finance package. bridges and tunnels.1 Funding for projects Public finance has provided most of the major infrastructure projects procured in the UK and overseas in the last 50 years. The use of private finance instead of public finance for a particular project is only justified if it provides a more cost-effective solution. Monies raised from taxation have provided all or part of the finance required for projects such as motorways. low-interest-rate loans or deferred or subordinated loans were provided by government. Often. financial risks and the appraisal of finance for projects are described. The financial plan of a project will often have a greater impact on its success than the physical design or the construction costs. and water and power plants.

1 Sources of finance. and vendors and contractors. a pension fund. an insurance company. o Equity n Banks and contractors n Founder shareholders n Private institutions. The more attractive. finance is often provided by a lender in the form of a commercial bank.1 shows a number of sources of funding for projects. the project is often increases the number of sources of finance.2 Sources of finance In major projects. Other project finance sources include institutional investors. in terms of potential returns. niche banks and developers. investment banks. 2nd tranche . an export credit agency or a development bank. 1st tranche n Public investors. large corporations. Figure 6. Figure 6. In the Channel Tunnel project. utility subsidiaries. with finance being raised from the sources listed below. for example the debt/equity ratio was initially set at 80/20.Project Finance 87 6.

3 Project finance Project finance is the term used to describe the financing of a particular legal entity whose cash flows and revenues will be accepted by the lender as a source of funds from which the loan will be repaid. economics and cash flows are segregated from its sponsors so that it is of strictly limited recourse. The original financing structure of this project involved 210 lending organisations. the project. In many cases. revenue is obtained from three sources. 1983) Project finance provides no recourse. finance will be provided purely on the basis of debt. and is normally arranged by one lender acting as a lead lender for a number of banks or institutions. shuttle services. the project's assets. with 30% of the loans being arranged through Japanese banks. main facility n Commercial banks. privately financed projects are financed by a combination of debt and equity capital. i. project finance may be defined as the financing of a particular economic unit in which the lender is satisfied to look initially to the cash flows and earnings of that unit as the source of funds from which the loan will be repaid and to the assets of the economic unit collateral for the loan. 3rd tranche Public investors. Thus. and if the project revenues are not sufficient to cover the debt service. British and French railways. . standby facility n n o In order to pay the loan arrangements. contracts. being self-funding and self-liquidating in terms of financing. and other associated facilities.e. Unlike traditional public sector projects whose capital costs are largely financed by loans raised by government. (Nevitt. 4th tranche Debt n Commercial banks. in that the lenders assume some of the risk of the commercial success or failure of the project.88 Engineering Project Management Public investors. 6. governments or multi-national guarantee agencies may guarantee loans over specific lending periods for specific types of project. Many lender organisations will only lend to projects with reasonably assured cash flows and sufficient government support. In some cases where no equity finance is deemed to be necessary. and the ratio between these two types of capital varies between projects. the lenders have no claim against the owner beyond the assets of the project. In summary. in effect.

A variety of risks. A private finance package is dependent on the type of project. and finally to the operational phase. it is important that each project and hence finance package. . A variety of contractual arrangements. and it is often a requirement of a promoter organisation that the parent company should guarantee performance by the sponsor. 6. (1) (2) (3) (4) (5) (6) (7) (8) Special project vehicle (SPV). the loan schedule and the possible effect of associated risks. Sound income stream of the project as the predominant basis for financing. Off-balance-sheet transaction. However. No project progresses without financial resources. In most projects.Project Finance 89 Financing a project is often the most difficult operation. This is similar to the conditions for the original loan companies. the currencies of the loan. which consumes mainly human expertise and analytical skills. If private finance is to become a major feature in procuring infrastructure projects which are normally undertaken by the public sector. with the largest risks occurring during the construction phase. the rate of expenditure changes dramatically as the project moves from the appraisal stage. Similarly. the nature and amount of financing required during different phases of the project varies widely. A variety of financial instruments. Often. The basic features of project finance are summarised below. lending organisations must look to guarantees to cover such risks on loans provided to sponsors.4 Financial instruments All projects require financing. Broadly. then to the manufacture and construction phase. a project may be said to pass through three major phases: o o o project appraisal. project operation. is considered on an individual basis. Non-recourse or limited recourse funding. A variety of participants. project implementation/construction. Government support must be given to projects that would not be commercially viable in the private sector to ensure that the social and economic benefits of projects are enjoyed by the users. equity finance is arranged to overcome this problem before revenue is generated by the project. to the design stage.

relatively less financing is required. This is normally done by issuing or selling securities. finalisation of the contracts.90 Engineering Project Management The precise shape of the cash flow curve for a particular project depends on various factors such as the time taken in setting up the project objectives. These instruments are normally described as `mezzanine finance'. In project financing. which peaks at the completion stage. the project may require financing for short periods to meet the mismatch between receipts and payments. are in the form of a claim on the future cash flow for the project. The steeper the curve. known as financial instruments. it is this future cash flow that becomes the basis for raising resources for investing in the project. Finally. The rate of spending is also depicted by the steepness of the curve. Debt is . the requirement of financing from outside becomes less and less.' Traditionally. The negative cash flow until the project breaks even clearly indicates that a typical project needs financing from outside until it does break even. It is the job of the project finance team to package this cash flow in such a way that it meets the needs of the project. even after the break-even point. the greater the need for finance to be available. Once the project is commissioned and starts to yield revenues. which acts as a security in the event of future cash flows not materialising as expected. financial instruments were in the form of either debt or equity. The shape of the curve also reveals that in the initial phase of the project. and at the same time is attractive to the potential agencies and individuals willing to provide resources for investment. These securities. a thorough knowledge of the financial instruments and financial markets in which they trade is essential. Merna and Owen (1998) describe financial instruments as `the tools used by the SPV to raise money to finance the project. the project starts to generate sufficient resources for its operation and maintenance and also a surplus. Projects have to raise cash to finance their investment activities. Developments in the financial markets and financial innovations have led to the development of various other types of financial instrument which share the characteristics of both debt and equity. design finalisation. As the project moves on to the implementation phase there is a sudden increase in the finance requirement. At the same time. obtaining statutory approvals. The nature and seniority of the claims on the cash flow and assets of the project vary with the financial instrument used. the rate and amount of construction. In order to achieve this objective effectively. finalisation of the financing arrangement. Debt instruments refer to those securities issued by the project that make it liable to pay a specified amount at a particular time. However. and the operation speed. these instruments have a contingent claim on the assets of the project.

equity and mezzanine finance. The `offer of sale' of equity shares made no mention of shareholders entitlements after the concession is transferred to the UK and French governments in July 2042. Financial engineering techniques are being put to wide applications such as modelling and forecasting financial markets. Mezzanine finance occupies an intermediate position between the senior debt and common equity. junk bonds. revolving underwriting facility (RUF). The tools used by financial engineers comprise the new financial instruments created during the facility for the Channel Tunnel project. development of derivative instruments and securities. Equity is normally in the form of ordinary shares and preference shares. the financial engineers use specialised financial instruments and tools to improve financial performance. i. or `the use of financial instruments to restructure an existing financial profile into one having more desirable properties'. the loan is . a project may also utilise certain other types of instrument such as leasing. note issuance facility (NIF). warrants and convertible bonds. under which 70% of the project equity had to be spent before any loans could be taken up by the promoter. On the balance sheet. aid and depository receipts. The term financial engineering can be defined as `the development and creative application of financial technology to solve financial problems and exploit financial opportunities'. 6. Euro bonds.Project Finance 91 senior to all other claims on the project cash flow and assets. the loan never comes to maturity. asset allocation and investment management. Mezzanine finance instruments include plain vanilla bonds. Debt instruments include term loans. export credit. Mezzanine finance typically takes the form of subordinated debt. debentures. equity equals total assets less all liabilities. floating rate bonds. This is characteristic of investment equity capital. junior subordinated debt and preferred stock. It has the lowest rank and therefore the last claim on the assets and cash flow of the project. Euro currency loans. supplier's credit and buyer's credit. As well as debt. and asset/liability management. or some combination of each. discount bonds.e.5 Financial engineering Just as engineers use special tools and instruments to achieve engineering perfection. since unlike other forms of capital market lending. venture capital. hedging and financial risk management. Ordinary Equity refers to the ownership interest of common stockholders in the project. income bonds.

92 Engineering Project Management permanent and is never repaid. equity shares are negotiable and may be transacted on the Stock Exchange. Minimise refinancing risk: cost overruns present additional problems to a project. In order to manage various types of risk. Loan summary: the true cost of each loan. o o o o The total size of the project: the size of the project will determine the amount of money required and the effort needed to raise the capital. defines the rights and obligations of lenders. and serves as the bid document for accessing capital markets. Milestones: significant dates related to the financing of the project. The components of a term sheet determine whether a loan would be sanctioned for a particular project. Break-even dates: critical dates when equity investors see a return on their investments. A properly structured financial loan package should achieve the following basic objectives.6 Debt financing contract The contract between the sponsor and lender can only be determined when the lender has sufficient information to assess the viability of a project. This term sheet. and provide a mechanism for orga- . based on agreement among the project participants. the amount drawn and the year in which drawdowns reach their maximum. 6. which would not affect the balance sheet of the sponsors' parent company. and therefore standby credit facilities from lenders and additional capital from promoters should be made available. In construction projects. a lender will often prepare a term sheet. However. o o o Maximise long term debt: allow the project entity itself to incur the debt. and describes default conditions and remedies. the lender will look to the project itself as a source of repayment rather than the assets of the project. The key parameters to be considered by lenders include those listed below. the internal rate of return on the project and the equity. Maximise fixed-rate financing: the utilisation of long-term export credit facilities or subordinated loans with low interest rates over long terms will reduce project risks.

Ratios of less than one mean that the debt will not be repaid over the term of the calculation. the coverage ratio. interest during operation. and ratios in excess of one provide a measure of comfort should variations from the assumptions occur. and should the ratio be less than the lender's requirement. the major criteria may be: o o the debt service ratio (defined as the annual cash flow available for debt service) divided by the debt service. interest rate risk (IRR). The main feature that will need to be agreed is the loan repayment method. lenders fees. interest during construction. preferred shares. dividends. in a project where the coverage ratio is 1:1. net present value (NPV). For example. Debt: loan and debentures The conditions of loan finance will depend on the criteria of the lender and the sponsor and the type of project considered. the debt will be repaid with no margin of error in the cash-flow projections.Project Finance 93 nisations to evaluate the financial parameters of a bid. 6. the coverage ratio (defined as the NPV of future after-tax cash flows over either the project life or the loan life) divided by the loan balance outstanding. a standby facility. The term sheet may be used to express such ratios for one or a number of risks analyses. drawdown of loans. .7 Types of loans The loan structure of a finance package is often the most important ingredient in the success of a project. These parameters may include a bank loan. the payback period of loans. Lenders will need to be satisfied that the project can be seen to be viable for each risk analysis. equity. In assessing the adequacy of projected cash flows. The structure of the loan may be in any of the forms described below. then the loan package may be considered commercially non-viable for the risks to be covered. the working capital and the debt service ratio. While the debt/service ratio is used in the evaluation of limited resource financing in all types of industry. index or coupon bonds. the coverage ratio is a wellestablished criterion for the evaluation of oil and gas projects.

An example of applicable margins are: o Main loan facility n pre-completion 1. this means that the proportion of capital repaid is small. This structure is useful for projects which do not begin to generate revenue until fully operational. and could only be considered for projects where the sponsor intended to sell the facility immediately after commissioning. the principal is repaid at the end of the loan period in one sum. and the lender from decreases below the agreed collar. With a maturity loan. while capital and interest vary. Initially. With equal instalments of principal. with the total amount paid decreasing over time as it consists of a constant principal repayment plus interest on outstanding principal. These floating upper and lower rates are often fixed to maximum and minimum rates by introducing a cap and a collar. This form of loan is suitable for projects where no revenue is generated until the project is operational. Repayment method Interest rate The interest rate will often be governed by the money market rates. Other variations of repayment structures may include a moratorium on capital repayments or interest payments for a period at the start of the loan. but progressively increases throughout the project. Interest rates may be fixed for the period of the loan. the amount of principal repaid is constant with each payment. or expressed as a percentage of the standard base rate. The sponsor is protected from interest rate increases over the agreed cap. respectively. or a sunset payment at the end of the loan period. In some cases the rate of interest will be determined as Rate of interest = Relevant margin + Libor where Libor is the arithmetic mean of the rates quoted by the reference banks.25% n post-completion 1.00% . which vary considerably.94 Engineering Project Management A mortgage may be set up with repayments calculated so that the total amount paid at each instalment is constant. In some cases. the sponsor may negotiate a floating rate where an upper and lower limit are set on the interest rate. This form of loan is most suitable for projects which generate a large capital sum on completion. a bullet payment.

In such a project the oil. An example of this form of agreement is the use of oil as payment for goods and services supplied. an agreement providing the lender with an agreed percentage of future revenues. is countertrade. i. the lender accepts that surplus cashflow over the operating costs will cover interest payments arising from the debt. this is usually in the form of a charge on the project's assets or through a guarantee. especially in developing countries. The interest paid to debenture holders is deductible when calculating taxable profits. non-recourse loans are normally adopted. Under this form of agreement. Mezzanine finance may be in the form of fixed. for example.or floating-rate loans with second charge assets. Debentures can be traded in the same way as shares. goods are exchanged for goods. Mezzanine finance is an innovative form of finance to enhance the return to shareholders. unlike dividend payments. unsecured loan stock. Under this form of loan. and also to repay or redeem the principal at some future date. currency swaps and revenue bonds.Project Finance standby facility n pre-completion 1. Other forms of lending may include export credits.e. The company agrees to pay the lender a stated rate of interest. Alternative finance packages may be based on: o o royalty agreements. i. Debentures A debenture is a document issued by a company in exchange for money lent to that company.25% working capital facility 1. would be sold on the open market or under a sales contract to generate revenues for repayments of capital and interest. Another type of finance that may be considered for projects. or in some cases the facility itself has a realisable capital value. the lender seeks to limit risk by insisting that the borrower provides security for the loan. In most cases the success of a project depends entirely on cash flow. In projects where the amount involved may be too large for participants to provide a guarantee.e. These are similar to conventional loans in that they provide for the payment of interest and principal through a flexible amortisation schedule. a floating interest rate loan.5% 95 o o Security On conventional loan finance.5% n post-completion 1. fixed-interest loan stock which gives the .

loan facilities which form part of the finance plan of the project. They exist to finance the costs of. and additional works performed under the construction contract. an agency fee.96 Engineering Project Management lender the right to a fixed return and to obtain repayment of the principal at the end of a stated period. operation and maintenance.e. a typical finance package may also include the payment of fees such as: o o o o o an underwriting fee. payable as a percentage of the bank loan facility. i. lower than expected revenues in the early phase of operation. fixed-interest loan stock with the right to convert to ordinary share capital at a future date. convertible preference shares. Providers of equity are compensated with dividends from . In addition to the loan facilities. a management/front-end fee. convertible unsecured loan stock. shares giving the investor the right to a fixed return and to convert to ordinary share capital at a future date. redeemable preference shares. shares giving the investor the right to a fixed return and to obtain repayment of the investment at the end of a stated period. and associated with. i. and to finance the construction of the project. payable as a percentage of the total loan once all loans have been secured. which is an annual fee paid to the lead lending bank.e. o o o A typical project loan facility may include: o o o a main bank facility a letter of credit facility standby facility The first two facilities are available to finance any cost associated with the acquisition. and costs associated with an existing facility included under the concession contract. calculated on the undrawn balance. a commitment fee. Equity finance Equity finance is usually an injection of risk capital into a company or venture. a success fee. i.e. payable as a percentage of the total facilities put in place. The third facility will be available to meet any required drawdowns in excess of the main bank facility due to higher interest rates.

financial institutions such as pension funds. vendors and government. those with an interest in the project (contractors. Providers of equity fall into two categories. the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). Lenders will often overcome this commercial risk by entering into a sales contract for the product or service at prices suitable to meet the loan schedule. but with no return should the venture be loss-making. In projects considered to have a large degree of risk. The host country's inflation may often result in additional loans being required to complete a project if no fixed exchange rate is agreed. and that equity investors are often committed to the success of a project since they are organisations involved in the realisation of the project.Project Finance 97 profits if a company or venture is successful. Sources of equity include public share issues. companies and individuals. Fluctuations between the values of the currencies provided in a project loan need to be addressed by the lender. The amount of equity provided is considered to be the balance of the loan required to finance the project. operators. . Similarly loans to countries which do not have transferable or exchangeable currencies. and international agencies such as the International Finance Corporation (IFC). However. participants such as constructors. need to be based on either guarantees from a third party or countertrade. should the selling price of such minerals or services reduce during the repayment period. vendors. This may be in the form of minerals or services. equity investors rank last in the order of repayment and may lose their investment. In the event of a company or venture becoming insolvent. The advantages of an equity investment are that equity may be used as a balancing item to accommodate fixed repayments. In the case of the latter. a product is provided in lieu of the loan repayments. then a larger proportion of equity is normally provided. suppliers. The total finance package is often described in terms of the debt/equity ratio. finance is often provided in a mixture of currencies. then the lender may not even recoup the principal loaned. In a number of overseas projects. Debt service in the majority of cases takes first call on profits whether or not profits have been generated. such as those of many eastern European and African countries. often based at the time of the loan on the host country's currency. dividends are paid after debt claims have been met. operators) and pure equity investors (shareholders).

i. Three basic financial criteria need to be considered in projects.98 Engineering Project Management 6. and industrial/process plants up to 14 years. in the Dartford River crossing project. It is possible that project finance is provided entirely from debt. management and syndication fees).g.e. for example. are normally the determinants of a successful project. so far as possible the skilled use of finance at fixed rates to minimise risks should be adopted. finance must be cost-effective. which are often allocated to the constructor or operator. the perception of the country's risks and limits. Lenders often refer to a robust finance package as one which will allow the repayment of loans should interest rates increase during the operation period. the lenders take the risk that revenues will be sufficient to pay off the debt by the end of the concession period. the following aspects should be considered: the strength of the security package. is less controllable than the technical risks. a form of equity under which . rather than the technical elements. the sophistication of local capital markets.8 Appraisal and validity of financing projects The financial viability of a project over its life-time must be clearly demonstrable to potential equity investors and lending organisations. Institutional investors such as insurance companies and pension funds often consider projects with fixed rates of return up to 20 years to match the cash-flow characteristics of their liabilities. The commercial and financial considerations. In assessing the attractiveness of a financial package. In such a case. securities (guarantees from lenders) and documentation (required for application. activation and drawdown of loans). The political risk. The EIB will normally fund infrastructure projects for a period of 25 years. associated charges (legal. The project must have clear and defined revenues that will be sufficient to service principal and interest payments on the project debt over the term of the loans. and to provide a return on equity which is commensurate with development and the long-term project risk taken by equity investors. In this project. When selecting the sources and forms of capital required. e. currency of payment. repayment period. which in turn influences the financial risk. debt/equity ratio (percentage being financed). the promoter provided pinpoint equity of only £1000. project sponsors should examine the following elements: o o interest rate. and finance would be required over a long term.

One of the most important elements to be met in project finance is how to provide security to non-recourse or limited-recourse lenders. for example. and bring in new contractors. which are functionally almost equivalent to sovereign guarantees. various security devices are often included. For example. These may include: o o o o revenues which are collected in one or more escrow accounts maintained by an escrow agent independent of the sponsor company. the benefits of various contracts entered into by the sponsor. supplier warranties and insurance proceeds. suppliers or operators to complete the project. the lender may be left with a partly completed facility which has no market value. In summary. However.Project Finance 99 shareholders do not receive dividends and the remaining finance is through loans. lenders may insist upon the right to take over the project in cases of financial or technical default prior to bankruptcy. but which guarantees the promoter a secured income. In some cases government organisations may take an equity participation in the project. will normally be assigned to a trustee for the benefit of the lender. such as construction contracts. a promoter may lease a tunnel from a sponsor based on an annual payment irrespective of the number of vehicles using the facility. A time-period revenue stream is normally a predetermined payment by the promoter to the sponsor which is independent of the usage of the facility. lenders and export credit agencies may insist on measures of government support such as standby subordinated loan facilities. in most cases user revenue streams are related to the level of use of the facility. the providers of finance are compensated solely from the project revenue with recourse to the revenue stream. In build±own±operate±transfer (BOOT or concession) project strategies. If a sponsor defaults under a particular project strategy utilising a nonrecourse finance package. performance bonds. debt financing entirely in . therefore. the number of vehicles using a tunnel multiplied by the toll rate would be considered as a user revenue. To protect lenders. the successful elements required in funding projects should include limited and non-recourse credit. but many sponsors believe the inclusion of the government among the project company shareholders can lead to bureaucratic interference with project development and operation which privatisation is supposed to avoid. The payment of revenues in BOOT projects may be arranged according to the timeperiod revenue streams or user revenue streams.

dividends. default by lender. take or pay terms. rate of return. type of equity offered. and uninsurable risks.e. scheduling of payments.e. existing debt.e. Financial risks may be summarised as: o o o o o o interest. take-up of shares. institutional support. holding period. project creditors who are confident. type and source of loan. especially in the early stage of project appraisal. the effect of escalation and debt service risk. but does not generate sufficient revenue to cover operating costs and debt service. floating or capped). fixed payments.e. mixed currencies. equity finance in currencies considered to be relatively strong. major innovations in project financing. namely. equity. discount rates. Financial risks may include foreign exchange risks. payback. but may be insurable at a cost. i. off-take agreements. i. A project often has a number of risks. i. and governments which accept some project risks and provide limited resources. standby loan facility. i. covenants. a realistic estimate of the duration and final costs and revenues of a project may be determined. .e. Lenders and investors will only be attracted to projects that provide suitable returns on the capital invested. risks which may not be within any parties reasonable control. i. ratio of local/base currencies. currencies. currencies of loan. type of rate (fixed. 6. debt/equity ratio. changes in interest rate. existing rates. loan. cash-flow milestones.100 Engineering Project Management local currency. cost of servicing loan.9 Risks The identification of the risks associated with any project is a necessary step before analysis and allocation. availability of loan. identifiable risks which are within the control of one or more of the parties to the project. By identifying risks at the appraisal stage of a project. i. This may arise during the operation phase when the machinery is running to specification.e. time and amounts of dividend payments. Financial risks Financial risks are associated with the mechanics of raising and delivering finance and the availability of adequate working capital. loan period.

Commercial risks affect the market and revenue streams. such as oil and gas reserves. regulated tolls. i. shadow tolls. the ability to meet increase in demand. Project revenues can be either market tied or contract tied. Commercial risks Commercial risks are considered when determining the commercial viability of a project. market uncertainty. i. market-led or contract-led revenues. pricing strategy and demand. i. the market price of raw materials increases during the construction phase. and may include: o o o demand. take and/or pay payments. Demand risks are normally uncontrollable on a road project. One way to minimise product market risk is direct financial participation by customers. which may include risks associated with access to new markets. developments. toll. price fluctuations. tariff variation formula. and market-tied revenues normally impose higher risks on the project sponsor. the market price of the product falls. and if demand is less than predicted then debt service may become impossible.e.Project Finance Revenue risks 101 The risks associated with revenue generation are often considered on the basis of meeting demands. the size of existing markets.e.e. toll level. or fails to rise as anticipated. Market risks such as the failure of customers to meet sales agreements. obsolescence of the product or cancellation of long-term purchasing contracts may result in the commercial failure of a project. market forces change. demand over the concession period. during the construction phase. leaving no receptive market for the product once production commences. inaccurate assessments of outlets. currencies of revenue. Market risks prior to completion of a project would normally include: o o o o raw materials not available when required during the construction phase. Commercial risks arising from a deterioration of the competitive market position and overly optimistic appraisals of the value of pledged securities. . demand associated with existing facilities. the accuracy of demand and growth data. changes in revenue streams from associated developments.

location of project. escalation of costs of raw materials and consumables. which forecasts demand and establishes a maximum price. Financial analysis.e. Reservoir: i. operation and maintenance. cost and conditions of financing a project. Commercial risks may be summarised under six main headings.e. Ecological: i. Lenders and investors should evaluate these risks to determine the commercial viability of a project. changes in ecology during concession period. external factors affecting operation. o o o o Financial market analysis. effect of environmental impact. the market and the financial market analysis and establishes the relationship between costs and revenues. Market analysis.102 Engineering Project Management In international projects. convertibility of revenue currencies.e. The two major base currencies used in this type of simplification are the US dollar and the German mark. recession. changes in demand for a facility or product. quality of product. existing environmental constraints. construction and operating costs and establishes a minimum cost of the project.e. effect of pressure groups. economic downturn. and also evaluates the commercial viability of the project. which estimates the development. social acceptability of user-pay policy. Cash flows determined by a number of currencies may be simplified by classifying currencies into groups. Currency: i. legal and environmental factors should be identified and appraised. changes in environmental consent. which compares the cost. and political. o o o Sensitivity: i. Impact: i. impending environmental changes. which considers data regarding the availability.e. A typical project finance analysis can be summarised under four main headings. changes in input source. Should a project seem to be commercially viable from a financial point of view. foreign exchange risks may be minimised by financing a project in the same mixture and proportion of currencies as those anticipated from the revenue streams. marketing of product and consumer resistance to tolls. Cost analysis. o o o Market: i. devaluation.e. fluctuation in exchange rates. . then additional risk areas associated with construction.

Allocation of risks Typical responses by lenders to minimising risks in projects may be summarised under the headings listed below. adjusting cash flows for the cost of risk reduction. o o o o o o o o Completion risk: cover by a fixed price. Performance and operating risk: cover by warranties from the constructor and equipment suppliers. adjusting cash flows to reflect the specific impact of a particular risk. 4th edn. Cash-flow risk: cover by utilising escrow arrangements to cover forward debt service and guard against possible interruptions. P. turnkey construction contract with stipulated liquidated damages. Asia Law & Practice. The New Dynamics of Project Finance. Bank of America. Financial Services Division. G. and performance guarantees in the operation and maintenance contract. References Merna. Insurable risks: cover by a form of insurance such as a policy to cover cash flow shortfalls. and take out commercial insurance. . Nevitt. (1998) Understanding the Private Finance Initiative. mainly during the pre-completion phase of a project. Commercial risk: cover by insurance policies such as the Export Credit Guarantee Department (ECGD). p. and Owen. Inflation and foreign exchange risk: cover by government guarantees regarding tariff adjustment formula. raising the required rate of return of the project investment. firm date. (1983) Project Finance.Project Finance 103 Practical methods of reducing risks in international investment analysis may include: o o o o reducing the minimum payback period. Uninsurable risks: cover by insisting host government provide some form of coverage for uninsurable risks such as force majeure. Political risks: cover by political risk insurance from export credit agencies or multilateral investment agencies. Hong Kong.K. A. 78. minimum revenue agreements and guarantees on convertibility at certain agreed exchange rates.

(1998) Financing and Managing Projects. A. Vol. A. (1998) A Financial Risk in the Procurement of Capital and Infrastructure Projects. 2(3). Asia Law & Practice. A. (1990) Financing Construction Projects: Financial Control. 2nd edn. N. (1998) Financial Engineering in the Procurement of Projects. and Njiru. Merna. Asia Law & Practice. Hong Kong. Merna. M. 2nd edn. London. pp. 2. M. Barnes) Thomas Telford. M. C. Asia Law & Practice. Hong Kong. Hong Kong. and Smith. Hong. Vol. Engineering Management Guide.J. National Economic Development Council. and Smith. . 1st edn. Merna. A. Asia Law & Practice. 1. Merna.J. A. Series (ed. International Journal of Project and Business Risk Management. 61±2. Asia Law & Practice. A. Kong.104 Engineering Project Management Further reading Jackson. and Dubey. (1996) Projects Procured by Privately Financed Concession Contracts. N. London. and Smith.J. Hong Kong. A. Merna. NEDO (1990) Private Participation in Infrastructure. (1996) Projects Procured by Privately Financed Concession Contracts. and Richardson. N. (1996) Guide to the Preparation and Evaluation of Build±Own±Operate±Transfer (BOOT) Project Tenders. Merna.

the best approximation that can be made.1). these show a narrowing range and an increasing certainty as the project progresses. Many projects show massive cost and time overruns. i. This arises because there is little information available to the estimator in terms of scope.2 is shown. The key points to note are given below. an envelope similar to that in Figure 7. Estimates of cost and time are prepared and revised at many stages throughout the development of a project (Figure 7. The range of possible costs is much greater during the early stages. The objective of any estimate. no matter at what stage it is produced.Chapter 7 Cost Estimating in Contracts and Projects The purpose of this chapter is to indicate the theory. but certainty is only achieved following settlement of the final account(s) and auditing of all project-related costs.e. It is essential to recognise that there is a range of possible costs within which the most likely cost lies.1 Cost estimating The record of cost management in the engineering industry is not good. is to predict the most likely cost of the project. If the limits for the possible range of project costs over its timescale are plotted. o o Note the range of possible distributions. techniques and practical implications of cost estimating throughout the stages of the project cycle. organisation and time. The degree of realism and confidence achieved will depend on the level of definition of the work and the extent of risk and uncertainty. 7. These are frequently caused by underestimates rather than by failures of project management. and it would be unrealistic to expect them to be accurate in the accounting sense. 105 . They are all predictions. and cost data. Generally.

Tender Feasibility study B A C A C B Settlement ABC Maximum A Estimated range of costs (£m) Most likely B Actual cost Minimum C Design Feasibility study Tender Construction Claims settlement Figure 7. .1 Estimates at each project stage.2 Range of estimates over the project cycle.106 Engineering Project Management Figure 7.

The most important estimates for a project are probably those prepared at sanction. . if necessary. the cash flow based on the project programme. Risk decreases over the life of a project. i. any estimate should be presented as a most probable value. to predict the most probable programme for the works. It follows. This may not be continuous. with a tolerance. plus an allowance for general overheads. from time to time there may be increasing risks or new risks which arise during the project's development. Particular areas of risk and uncertainty should be noted and.g. The upper and lower bounds of the envelope are not absolute. e. because the project team is intent on looking ahead towards the project's completion rather than reviewing the whole of its evolution. therefore.2 Cost and price Cost refers to the cost directly attributable to an element of work. The requirements of an estimate are: o o o o o to predict the most probable cost of the works. Price refers to the cost of an element of work.e. taxes. a range of less likely values to emphasise that it is an estimate.e. It is at these points that the promoter and contractor become committed. and to base a forecast of expenditure. i. including direct overheads. and in reality are not clearly defined. those prepared at tender. insurances. supervision. a specific contingency allowance or tolerance should be included in the estimate.Cost Estimating in Contracts and Projects 107 o o o o Many risks are latent in a project at its earliest stages. 7. to state all assumptions and note all exclusions. finance (and interest charges) and profit (sometimes known as `the contribution'). and for a contract. The estimated base cost plus contingencies which are likely to be spent must be close to the `most likely' cost from the earliest stage if the common experience of underestimation is to be avoided. to identify and quantify potential problems and risks. Ideally. that the most likely value is closer to the maximum than the minimum to allow for cost growth. These often go unrecognised. Some of these are the result of a failure to recognise their importance or presence earlier.

The traditional view in construction projects. It requires an operator. These are highest for new pieces of equipment. Finally. is related to the level of resource which must be provided to carry out the work in the given time. the quantity of work to be done. but there are others which must be considered: o o finance charges on money borrowed for the purchase of plant and equipment. maintenance. The latter may be for on/off costs for a particular item. major plant and equipment numbers and labour force sizes cannot be varied on a day-today basis. the direct overhead costs of management. These costs refer to the permanent works. or on/off. the cost of concrete may vary depending upon whether it is sitebatched or not. as exemplified by the `schedule of rates' or `bill of quantities' (BoQ) approach. . Time-related costs are often dominant. plant and equipment costs. the only truly quantity-proportional costs are the direct costs of materials in the permanent works. and lump-sum costs. Therefore. as in the second case. time-related labour. The cost of operating a hoist or crane is a time related cost. regardless of the volume of concrete which it handles. establishment and consumables which can be charged against a project can be assessed. and decrease steadily until the debt is repaid or. Outputs and productivities are expressed in terms of a quantity of work in unit time. Hence. Any temporary works must also be covered by the prices charged by the contractor (or sub-contractor). In reality. is that costs are proportional to quantities. costs. the cost of an element of engineering work comprises quantity-proportional material costs.108 Engineering Project Management First. If the time taken to carry out the work is extended beyond the optimum then the cost will increase unless the provision of the resource is reduced. or a payment to a specialist sub-contractor. Time depends upon the output or productivity which can be obtained from the resources. depreciation in the value of a piece of plant as it ages. say in the BoQ. so the actual cost incurred is dependent upon the provision of the resource. but care is required. or time for a given quantity of work. This is true only to a very limited extent. until the piece of equipment has only a residual or scrap value. fuel and lubricants when it is working. the most probable cost of the works must be ascertained. regardless of the quantity of work which it performs. It is important to realise that in reality. For example. The cost of setting up the hoist or crane and later dismantling it are lump sum start and finish.

7. of engineering works must not be overlooked. interest charges on monies borrowed. and allowances or contingencies for risks and uncertainties. the cost of maintaining the head office buildings. it becomes the marker against which subsequent estimates are compared. and insurances. This is a gross oversimplification. degree of innovation. senior management. risk surrounding the project. Some factors which affect it are: o o o o the the the the type of work. knowledge of the market and not a little luck are required to make a realistic assessment. It is sometimes described as cost plus mark-up. The amount of profit which can be made varies. extent of competition. and hence price. There are general overheads incurred by an organisation which cannot be charged directly to a particular project. The first estimate that is published for review and approval has a particularly crucial role to play because: o o it is the basis for releasing funds for further studies and estimates. This is possibly the factor influencing the price which is the most difficult to assess. desire of the organisation to secure the work.3 Importance of the early estimates All estimates should be prepared with care. for example administrative staff. the contractor must make a profit after tax. . type of contract.Cost Estimating in Contracts and Projects 109 These must then be spread over the other cost centres to arrive at the total cost to perform the work. Finally. and experience. these may include: o o o o o o the the the the the the location. payment conditions. Other factors which influence the overall cost. good judgement. The price of the work is derived from the cost. The price must also cover the payment of taxes. size of the project or contract. These may be grouped together very loosely as `the state of the market'. method of measurement.

the capital cost of the project. the need to know. and the use of float or acceleration must be assessed. this will not be an onerous task. there is a need to have a realistic indication of the project's likely cost. resource. but that they also have. In so far as cost estimates are concerned. regardless of the size. novel methods of implementation. before significant monies are spent on developing designs and more detailed estimates. for the purposes of economic appraisal. the experience to make sound judgements regarding the levels of largely unquantifiable risk. but it can be decisive in the key decision to proceed with a project or to invest the funds elsewhere. For many projects. novelty or value of the particular project: o o o o o the sensitivity of the promoter's business or economy to the outcome of the project in terms of the quality of its product.and cost-intensive exercise. the need for new technology or the development of existing technology. any major physical or logistical restraints such as extreme ground conditions or access problems. By definition. capital cost and timely completion. Nevertheless.e. the project's programme must be carefully reviewed. complexity. the costs of delay. specific contingencies and general estimating tolerances. The decision of the promotor(s) to sanction the project should never be based upon the very first estimate. the latter is the quantification of allowances for uncertain items. However. and is capable of choosing and applying the most appropriate technique. . This can be achieved by considering a number of factors. risk assessment and the selection of the most appropriate responses are performed.110 Engineering Project Management There is a further reason for the importance of early estimates. The first step towards assessing the risk is to identify potentially high-risk projects. but for projects which are in any way unusual it is essential that thorough exercises in risk identification. this must be done before a great deal of detailed information is available. i. in conjunction with other members of the project team. and the appropriate contingencies must be included in the estimate. The capital cost may not be the most sensitive variable in such an appraisal. In addition. it is not necessary for all projects. large and/or extremely complex project. The earliest estimates are primarily quantifications of risks: there is little reliable data available to the estimator. To estimate effectively therefore requires that the estimator not only has access to comprehensive historical data. It is easy to see that this can be a time-.

quantifiable risk factors. a list of the main sources of risk should be prepared. but should not exceed fifteen.Cost Estimating in Contracts and Projects 111 o o o o any extreme time constraints. sensitivity to regulatory changes. .g. high or low. the project is inherently risky. each source of risk should be developed into several comprehensive lists of more specific. as a guide to the most important factors. If the result of the test outlined above is positive. further and detailed assessments must be performed of the potential sources of risk and their likely impact on the project. developed or developing country. where possible. Testing new projects against such criteria is the first step towards improving the realism of initial estimates. major or minor. location. because the estimator's attention should mainly be directed at these high-impact high-probability risks. Following this. For example: o o o o o o o o o o o o o promoter host government(s) funding definition of project concept and design local conditions permanent installed plant (mechanical and electrical) implementation logistics estimating data (time and cost) inflation exchange rates force majeur It should be noted that these are both quantitative and qualitative. manageable and. There are two components to any estimate: o o the base estimate. contingency allowances which are required to cover the uncertainty in the base estimate. the parties involved (promoter. It is useful at this stage to classify both the potential impact. Next. consultants and contractors) might be inexperienced. This may be as few as five. that is. and the probability of occurrence. e.

but the associated risks are so important that it is worth making the following general warning points about the use of historical data in estimating. it is necessary to consider the estimating function in greater depth. global.4 Estimating techniques Having distinguished between cost and price.112 Engineering Project Management 7. Table 7. uncertainties and peculiarities of the project Basic estimate data required Achieved overall Established costs of similar factorial projects estimating (adequately system defined) Recent quotes for main plant items Hourly rates Productivities Overheads Materials costs Historical unit rates for similar work items Preliminaries Labour rates and productivities Plant costs and productivities Materials costs Overhead costs Inflation indices Inflation indices Hourly rate forecasts (for historial Market trends Materials costs General inflation prices) Market trends forecasts forecasts General inflation Plant data forecasts Inflation indices Labour rate Market trends forecasts General inflation Materials costs forecasts forecasts Plant capital and operating costs forecasts Three of the techniques. 1995). Estimating technique Global Project data required Factorial Man-hours Unit rate Operational Size/capacity List of main Location plant items Completion date installed Location Completion date Quantities Bill of quantities Materials Location (at least main quantities Key dates items) Method statement Simple method Location statement Completion date Programme Key dates Completion date Completion date List of potential problems. are summarised in Table 7. (1) To obtain realistic estimates. risks.1 Data for the basic estimating techniques (Smith. Comments on this aspect of each technique are given under the respective headings. The five basic estimating techniques available to meet the project needs outlined above. factorial and unit rates. . the data must be from a sufficiently large sample of similar work in a similar location and constructed in similar circumstances.1. together with the data required for their application. rely on historical cost and price data of various kinds.

but some more specific problems are listed below. for example two-thirds of the way through the period. In the case of manufactured plant the easiest date to determine will probably be the delivery date. cost per megawatt capacity of power stations. i. and therefore must be used in conjunction with inflation and a judgement of the trends in price levels. Global This term describes the `broadest brush' category of techniques which relies on libraries of achieved costs of similar projects related to the overall size or capacity of the asset provided. particularly in times of high inflation and/or rapidly changing technology. a `mean' date has to be chosen. This technique may also be known as `order of magnitude'. and for international projects with the host country and also with the supplying countries. The use of this type of `rolled up' historical data is beset with dangers. Having selected the relevant base date. especially inflation. Examples are: o o o o cost per square metre of building floor area or per cubic metre of building volume. In the case of construction work carried out over a period of time. recourse to general indices is usually made. `rule of thumb' or `ballpark' estimating. If there is not. market influence. In any event. to allow for the envisaged timing of the project. but there may not be a sufficiently specific index for the work in question. The state of the market at the price date base will require careful consideration before historical data can be credibly applied to later or future dates. there is a limited length of time over which such updating has any credibility. cost per tonne of output for process plants. This will vary with the type of project being undertaken.Cost Estimating in Contracts and Projects (2) 113 (3) (4) Cost data need to be related to a specific base date. The only practical method is to use an inflation index. The technique relies entirely on historical data. Overlying the general effect of inflation is the influence of the `market'. whereas a `mean' date during manufacture may be more relevant. cost per metre/km of roads/motorways. .e. there remains the problem of updating the cost price data to the base date for the estimate. as outlined generally above.

e. it is essential to record the `mean' base date for the achieved cost and use appropriate indices to adjust to the forecast date required. n different logistics depending on site location.114 Engineering Project Management Different definitions of what costs are included. Market factors: n competition for resources during periods of high activity. for example: n engineering fees and expenses by consultants/contractors/promoter. including design. procurement and commissioning. transmission links/roads for power stations). Different definitions of measurement of the unit of capacity. n a metre/kilometre of motorway (is this an overall average. n plant and fittings supplied directly. or should these be estimated separately). n final accounts of all contracts.g. n different terrain and ground conditions. n a cubic metre of building volume (is the height measured from the top of the ground floor or the top of the foundations). n taxes and duties. o o o o o . n the units included in the associated infrastructure (for example. including settlements of claims and any `ex gratia' payments. n process plants on greenfield sites and on established sites. for example: n differing standards of quality. such as power stations with or without workshops and stores.g. n financing costs. including pro rata costs of interchanges. n transport costs. Not comparing like with like. etc. Inflation. n item prices taken out of total contract prices (especially turnkey) may be distorted by front-end loading to improve the contractor's cash flow. n land. construction supervision. e. n developing technology may influence unit costs. different cost base dates: n as noted above. especially for hard-currency items. for example: n a square metre of building floor area (is it measured inside or outside the external walls). n scope of work differences. housing compounds. roads across flat plains compared with those across mountainous regions. such as different runway pavement thicknesses for different levels of duty.

(1) The reliability of the budget prices for the main plant items. but nevertheless one should be prepared to identify problems of implementation. It follows that the most reliable data banks are those maintained for a specific organisation where there is confidence in the management of the data. The success of the technique depends to a large extent on four factors. the global technique is probably as reliable as an over-hasty estimate assembled from more detailed unit rates drawn from separate. A scrutiny of all these dangers. The technique does not require a detailed programme. instrumentation and controls systems).Cost Estimating in Contracts and Projects 115 Many of these items are obvious but for projects that do not have a continuous gestation period and may involve several different parties from time to time.g. During periods of significant design development. The estimator is still required to make a judgement on the value to include in his estimate depending on the state of the market and the firmness of the specification. The reliability of the factors. which should preferably be the result of long experience of similar projects by the estimator's organisation. as long as care is taken in the choice of data. The techniques provide factors for a comprehensive list of peripheral costs such as pipework. unrelated sources and applied to `guesstimates' of quantities. The estimate for each peripheral will be the product of its factor and the estimate for the main plant items. The wider the source of the data. it is essential that they are checked thoroughly. especially the effects of inflation. structure or foundations. electrical work. (2) (3) (4) . the greater is the risk of differences in definition. so that deficiencies in some areas will compensate for excesses in others. The adoption of the technique as a whole. and lead times for equipment deliveries or planning approval which will go undetected if the technique is applied in a purely arithmetical way. instruments. Factorial These techniques are widely used for process plants and power stations. However. The experience of the estimator in the use of the technique and his ability to make relevant judgements. and also where the core of the project consists of major items of plant which can be specified relatively easily and current prices can be obtained for them from potential suppliers. must be made before any reliance can be placed on a collection of data of this type. certain factors can change rapidly (e.

The estimator selects historical rates or prices for each item in the bill using either information from recent similar contracts. the capacity of heavy lifting equipment available in fabrication yards). The total man-hours estimated for a given operation are then costed at the current labour rates and added to the costs of materials and equipment. It is recommended that a detailed programme is prepared when using this technique to identify constraints peculiar to the project. and operations such as the fabrication and erection of piping. labour productivities. that where they do vary (for example. The advantages of working in current costs are obtained.116 Engineering Project Management The technique has the considerable advantage of being predominantly based on current costs. price books for building or civil engineering). except in a series of projects where the site circumstances are closely similar. work where there exist reliable records of the productivity of different trades per man-hour (for example process plant construction and fabrication of offshore installations). Experience has shown. plant and materials required for the . can be significantly affected. however. and consequently the total cost. Factorial techniques are not normally reliable for site works. including most civil. The technique is similar to the operational technique. In its most detailed form. Unit rates This technique is based on the traditional BoQ approach to pricing construction work. electrical installations and instrumentation. if any. building. or `built-up' rates from his analysis of the operations. It is most suitable for labour-intensive implementation and construction. The prediction of cash flow requires such a programme. it is often used without a detailed programme on the assumption that the methods of construction will not vary from project to project. In practice. the site works would need to be estimated separately using a more fundamental technique such as the operational one. thereby taking account of market conditions and needing little. a bill will be available containing the quantities of work to be constructed. reliance on inflation indices. or published information (for example. mechanical equipment. mechanical and electrical installation work. Man-hours Estimating the man-hours required is probably the original estimating technique. measured in accordance with an appropriate method of measurement. In most overseas locations.

and therefore it is not easily detected. When a detailed bill is not available. Nevertheless. Neither does it encourage consideration of the particular peculiarities. Therefore it does not encourage an analysis of the real costs of work of the kind that would need to be undertaken by a tendering contractor for any but the simplest of jobs. where the allocation of costs to specific operations is reasonably well defined and operational risks are more manageable. The unit rates quoted by contractors in their tenders are not necessarily directly related to the items of work they are pricing. It is also likely to be less successful for both civil engineering and building projects in locations where few similar projects have been completed in the past. quantities will be required for the main items of work. Taken to an extreme. From the promoter's point of view. it is subject to the general dangers outlined above. e. access problems. It is unlikely that a similar `weighting' is carried out by all tenderers in an enquiry. and the estimate is compiled by the direct application of historical `prices'. The technique is less appropriate for civil engineering. The technique is most appropriate to building and repetitive work.g.Cost Estimating in Contracts and Projects 117 item measured. constraints and risks affecting the project. Its success in this area depends much more on the experience of the estimator and his access to a well-understood data bank of relevant `rolled up' rates. the cruder unit rate estimates come into the area of global estimates. It follows that tendered bill unit rates are not necessarily reliable guides to prices for the work described. the technique does not demand an examination of the programme and method of construction. and these will be priced using `rolled up' rates which take account of associated minor items. as well as taking some account of the bill item descriptions. There is a real danger that the precision and detail of the individual . requirements. unit rate per metre of motorway). and internationally many contractors are able to tender by pricing bills of quantities using rates based directly on continuing experience. It is common practice for a tenderer to distribute the monies included in his tender across the items in the bill to meet objectives such as cash flow and anticipated changes in volume of work. where the method of construction is more variable and where the uncertainties of ground conditions are more significant. As the technique relies on historical data. it is essential that the rates are selected from an adequate sample of similar work with reasonably consistent levels of productivity and limited distortions arising from construction risks and uncertainties. Sophisticated methods of measurement for building have been developed in the UK. as described above (for example.

access to a reliable. site conditions and other factors. It must not be assumed that the previous work was of the same nature. The advantage of working in current costs is obtained. the sensitivities of the estimate to alternative assumptions or methods can easily be investigated. and from the accumulated demand for resources. and the ability to assess the realistic programme and circumstances of the work. It also provides a detailed current cost and time basis for the application of inflation forecasts. and especially in the circumstances of the specific activity under consideration. Collections of productivity information tend to be personal to the collector. Because the technique exposes the basic sources of costs. The most difficult data to obtain are the productivities of labour. since the total cost of the work is compiled from a consideration of the constituent operations or activities revealed by the method statement and programme. organisation. Operational cost (resource cost) This is the fundamental estimating technique. Despite its shortcomings. and also from country to country. and all are affected by inflation. carried out in identical conditions and of the same duration. the operational technique for estimating holds the best . but these need to be reviewed in the light of actual experience. Many construction costs are time related. and indeed this type of knowledge is a significant part of the `know how' of a contractor and will naturally be jealously guarded. Claimed outputs of plans are obtainable from suppliers. plant and equipment in the geographical location of the project. Labour productivities will vary from site to site depending on management. and the reasons for variations in cost appreciated.118 Engineering Project Management rates can generate a misplaced level of confidence in the figures. industrial relations. unit-rate estimating is probably the most frequently used technique. and hence the compilation of a project cash flow. It is therefore recommended that a programme embracing mobilisation and construction is prepared. as are the fees of supervisory staff. It can result in reliable estimates when practised by experienced estimators with good intuitive judgement. well-managed data bank of estimating data. plant and materials are costed at current rates. This should be used to produce a check estimate in a simplified operational form where there is any doubt about the realism of the unit rates available. In particular. The duration of the work will have a significant effect on the cost. Labour. The operational technique is particularly valuable where there are significant uncertainties and risks.

Action to reduce the effects of risks should be taken where possible. Ideally. This is related to the level of detail available for estimating. This is the most reliable estimating technique for engineering work. and for a usable record in a cost data bank.5 Suitability of estimating techniques to project stages The objective should be to evolve a cost history of the project from inception to completion with an estimated total cash cost at each stage nearer to the eventual outturn cost. 7. In practise. and only a crude indication of the project size or capacity.Cost Estimating in Contracts and Projects 119 chance of identifying risks of delay as it involves the preparation of a method of implementation. There is likely to be no design data available. and appropriate allowances included. which represent uncertainty. This is a crude system which relies upon the existence of data for similar projects assessed purely on a single characteristic such as size. this may be difficult to achieve. Preliminary This is an initial estimate at the earliest possible stages. capacity or output. and a sequential programme including an appreciation of productivities. and the estimate is likely to be of use in provisional planning of capital expenditure programmes. Widely used on process plants is the factorial method. and all other works are calculated as factors of these components. each estimate should be directly comparable with its predecessor in a form suitable for cost monitoring during implementation. Its execution is relatively time-consuming and resource-intensive compared with other techniques. where the key components can easily be identified and priced. . At this stage the global estimating technique can be used. Sensitivity analyses can be carried out to determine the most vulnerable operations. There is some correlation between the five estimating techniques which have been described and the estimating stages which have been defined. This can be achieved if the rising level of definition is balanced by reducing tolerances and contingency allowances. uncertainties and special circumstances of the project. but estimating organisations geared up to this technique accumulate data in an operational form which enables them to prepare even preliminary estimates with some appreciation of the more obvious risks.

and allowances for supervision. Overheads (or on-costs) for the project could include allowances for site management and supervision. Usually. Quotations are required for materials and sub-contractors. It is rare for UK contractors in the domestic market to calculate the all-in plant rate from first principles. The elements in the calculation could include such factors as plus rates for additional duties. general items and sundry requirements. then it must be escalated to a cash estimate. plant. accommodation. National Insurance. materials account for between 30% and 60% of a project's value. materials and sub-contract work required. sub-contractors can typically account for between 20% and 40%. A price can be described by the following equation: Price = Cost estimate + Risk + Overheads + Profit + Mark-up The size of the profit margin and the commercial decision making behind the selection of the percentage mark-up or mark-down are not discussed in detail here. travel monies.120 Engineering Project Management Feasibility Sometimes known as appraisal estimates. tool money. The basic cost estimate is the largest of all these elements. per shift or per week. The cost of the company's own labour is usually calculated either per hour. often accounting for more than 90% of the total price. training levies. Erection or implementation Plant may be obtained for a contract either internally or externally. The cost to the company of employing their own labour is greater than that paid directly to the employee. employers and public liability insurance. This calculation is usually undertaken by the plant hire company. clerical staff and general employees. . these are directly comparable estimates of the alternative schemes under consideration. Typically. Quotations for the plant are therefore obtained from external hirers or from the company's own plant department. and if this is to be used to update the initial figure in the forward budget. They should include all costs which will be charged against the project to provide the best estimate of anticipated total cost. the basic cost estimate is derived from the unit rate or operational assessment of the labour.

maintenance or mechanical erection. Unless a re-design is undertaken. The decisions made in the design stage about the size. 7. Consequently. the project estimator must ensure that firm quotations. which usually evolves from a conceptual design until the immediate pre-tender definitive design is completed. where the quantities of work are defined and measured in accordance with a standard method of measurement. usually . with the consequent loss of fees and time. the ability to save money whilst maintaining the original design concept is very limited.6 Estimating for process plants The most significant difference between estimating for a process plant project and estimating for other types of engineering project is that the base cost of the process estimate is derived from material and equipment suppliers. are confirmed with all suppliers and sub-contractors. As a design develops. Implementation or construction This is an opportunity for a further refinement to reflect the prices in the contract awarded. together with guaranteed delivery dates and installation schedules. the engineering contractor.g. and would contribute to more efficient management of the contract. The unit-rate method is a technique based on the traditional bill of quantities approach. quality and complexity of a project have the greatest influence on the final capital costs of a project. These components commonly account for about 80% of the total cost of the project. the promoter is committed to a high percentage of the tender value. specialist contractors and sub-contractors. e. with the design complete or virtually complete. This would require some redistribution of the money. more and more capital cost is committed on behalf of the promoter until at the tender stage. The design budget estimate should confirm the appraisal estimate and set the cost limit for the capital cost of the project. in the BoQ in a unit-rate contract. plant vendors. The main process plant contractor.Cost Estimating in Contracts and Projects Design 121 This is an estimate for the scheme selected. A man-hours method is most suitable for labour-intensive operations such as design. The work is estimated in total man-hours and costed in conjunction with plant and material costs.

compared with 0. The initial global estimate can be made by comparative means with similar types of plant. At this stage. allowances and contingencies need to be considered.e. Costs will be established for project and engineering services. . It is important to have a good definition of the scheme. including the general arrangement. The engineering contractor's control philosophy must be aimed at minimising changes at the detailed engineering phase. Typically. the erection of process plants is labour-intensive. for the work to be undertaken at the detailed design. and has to be considered no matter how much detailed work has been completed during the preparation of the estimate as there will undoubtedly be uncertainties which will affect the final cost. or nett cost. It is often the case that when firm quotes are replaced with contracts and orders after the successful tender bid. or to provide for anticipated developments. a 3-month tender period for most major process plant projects is allowed by most promoters. i. more details are available than was the case earlier. about 20%. Contingency adjustments allow for the unknown elements. estimate. which is really too short to enable all the requirements of the estimate to be completed. and hence this assessment is made using the man-hours estimating technique. the effects of layout and location are considered in the preparation of the base. The cost of preparing a fixed-price estimate can be as high as 1±3% of the total cost. and whether any design alternatives should be pursued. based on throughput. critical dates for actions by sub-contractors and suppliers. and also for any factors outside the control of the engineer contractor which are perceived to be likely to affect the final cost. as accurately as possible. procurement. which account for most of the remaining cost.5±1% for building and civil engineering work. the items to be subcontracted. Contingency is an adjustment to the nett cost. Allowances can be defined as costs added to individual estimated costs to compensate for a known shortfall in data.122 Engineering Project Management carries out the design. In the production of a nett cost. The first task is for the engineering contractor to estimate his own base costs. and any remaining quotes are substantiated and confirmed. the materials and plant for which quotes are required. Typically. piping and instrument diagrams. The estimate will have taken into consideration the principal quantities of the work. project management and site supervision stages of the project. procurement and management functions. which are usually done in-house. and it can take up to 6 months to prepare. equipment lists and materials specifications.

The application of IT cannot replace the role of the estimator in the project. transfer and retrieval of data. but there are also other advantages for the project manager. as will the operation of the user interface. the ability to update or alter any of the input data. the role of computer estimating will depend upon the user's requirements. but has more time for the use of judgement and experience where appropriate. The data available for the production of an estimate will also be different. It is important to note that a computer-based estimate is only as accurate as the input data. and the presentation of output. This section does not contain details of specific hardware or software products. then the estimate produced might suffer from a decrease in accuracy. and that the use of a computer in itself will not necessarily increase the accuracy of the estimates. IT is concerned with the storage. but focuses on some of the main functions that IT can perform in this process. manipulation and calculation using data. the project estimate and detailed planning. and appropriate reporting formats.Cost Estimating in Contracts and Projects 123 7. Most computer software estimating packages incorporate a data library for storing data. dedicated computer software packages and increased computer literacy amongst the professionals engaged in project management and estimating has resulted in the application of information technology (IT) tools to facilitate and assist in the estimating process. The estimator has to spend less time performing routine calculations and arithmetical checks. Software packages are readily available to assist with most types of estimating technique. ranging from data libraries to fully automated expert systems. these stages were tackled . The software packages attempt to be user-friendly by permitting data input or price build-up by the estimator in a way which closely resembles the normal way of working. which are well marketed and are almost continually being updated and improved. or if it is applied without careful thought. As in manual estimating. a range of methods for manipulating direct costs to produce a price. One of the recognised sources of errors and misunderstanding in project management has been identified as the linking interface between the feasibility study. Often. whilst the basic method remains unchanged. The degree of complexity will vary. Those of a promoter at the design stage will be very different from those of a contractor at tender. Indeed. if the data library is not kept up to date. nor is it intended to do so. The development of computer hardware.7 Information technology in estimating The estimating techniques described above were mainly developed as manual methods.

The `expert' approach purports to provide tools for the effective representation and use of knowledge developed from experience. and where the previous estimate was usually abandoned once that phase of the project had been completed. and particularly on the extent of the residual risk and uncertainty at the time. Expert systems are attracting considerable interest as potential aids to decision making. and the make-up of the total must be expected to change. The ranges of accuracy for high-risk projects. The variation on individual items within the estimate is much greater. modified and developed as the project progresses. The realism of estimates will greatly depend on the nature and location of the work. It is preferable to use performance measurement systems based on an integration of the cost . An estimating package can be linked with a planning package. to the valuation of variations. 7. Studies have determined that a standard deviation of 7% was common for contractors' bid estimates in the UK process plant industry. and in particular development projects. hence retaining all the information within the system. A computer simulation then begins with a preliminary questions module in which the user responds to a set of questions posed by the system. but the performance of particular companies varied from 4% to 15%. is important. This allows all the work done at the feasibility stage to be refined.8 Realism of estimates The use of the word realism in this context. Current estimating software packages can be related to a single database and also be linked with other computer programs. As noted above.124 Engineering Project Management by different people using different estimating methods with associated differing assumptions. as discussed above. estimates are not accurate in the accounting sense. may be much greater. rather than accuracy. the level of definition of the project or contract. In an advisory role. Typical interfaces relate to measurement and valuation. facilitating an understanding of the relationship between time and money for the project. to BoQs. allowing the optimisation of resource selection. they could provide the necessary assistance towards producing the cheapest cost estimate by allowing automated decision making to select resources to match different work loads. and data can automatically be transferred. Estimating systems are evolving within an integrated environment as a decision-making or decision support. and consequently any system of cost control based on a comparison of actual and estimated cost must be of dubious value. and to delays and disruptions.

(1993) Integrating project time with cost and price data. THE PRESENT SITUATION Estimated cost Apparent cost overrun Actual cost Actual cost overrun due to: • Inefficiency • Lack of resources • Inadequate investigation • Lack of funds etc. Edinburgh. London.. In: Developments in Civil and Construction Engineering Computing. Civ-Comp Press. 2nd edn. D. The improvement in performance that should be obtained is illustrated in Figure 7. These systems are based on the concept of earned value. R. Bower. use of the most reliable data. Further reading Association of Cost Engineers (1991) Estimating Checklist for Capital Projects. 5th International Conference on Civil and Structural Engineering Computing. and Horner.W. McGowan.3.3 Estimating performance and objectives.A.Cost Estimating in Contracts and Projects 125 and the programme. Simulation studies using these systems suggested that an improvement in estimating accuracy will produce a corresponding improvement in company performance. P. P. Association of Cost Engineers. consideration of the risks. caused by unrealistic estimate THE OBJECTIVE Achievable cost Realistic estimate of probable cost showing tolerance Lowside tolerance Most probable estimate Highside tolerance Figure 7. Thompson. choice of the appropriate technique. pp. .. 41±9. Many estimating problems can be addressed by adopting: o o o o a structured approach.M.

) (1995) Project Cost Estimating. (ed. J. Blackwell Science.N. (1991) Estimating and Tendering for Civil Engineering Works. (eds) (1992) Engineering Construction Risks: A Guide to Project Risk Analysis and Risk Management. Oxford. Sweeting. and Baldwin.J.G. Institution of Chemical Engineers. J. . London. Thomas Telford. P. Rugby. Thomas Telford. R. A.A.126 Engineering Project Management McCaffer. N. Smith. Engineering Management Guide Series. Thompson. London. and Perry. 2nd edn. (1997) Project Cost Estimating: Principles and Practices.

or are affected by. The project is open to a host of influences from stakeholders. The success of failure of the project is dependent on how these primary stakeholders interact 127 . planning or execution. the achievement of the organisation's objectives.Chapter 8 Project Stakeholders This chapter focuses on the interaction between the project and its external environment. equity and debt holders. or are influenced by. They include. 8. because they are critical to the very existence of the project. among others. the project. the project's champions and sponsors. 8. the project. and staff on the project.1 provides a simple illustration of a stakeholder map. suppliers and contractors.1 Stakeholders All projects have to interact with the broader environment in which they exist. This definition applied to a project implies that project stakeholders are those groups or individuals that can affect. or is affected by. Edward Freeman (1984) suggests that a stakeholder in an organisation is any group or individual who can affect. Figure 8. Any project that fails to take due cognisance of the impact it is having on the external environment is likely to face difficulties in its approval. and will attract interest from people and organisations outside the project. Projects influence the environment. All these parties have an intrinsic interest in how the project performs.2 Primary project stakeholders The primary stakeholders on a project are those parties that have an immediate influence. These parties have the ability to either hinder or promote projects. Stakeholder analysis offers the opportunity to identify those parties that are influenced by the project or can influence the project.

It is important that the project management team understand what the project objectives mean for the on-going business activities of the project's champions. they can . local authorities. it is important to note that not every primary stakeholder will be equally affected should a project be unsuccessful. consumer groups. the failure of a new technology project or new product development project can reduce an organisation's competitiveness or market standing. However. etc. 8. political parties. In circumstances where the broader business objectives are communicated. This awareness is sometimes difficult to achieve. There is a great deal of diversity and potential influence among these secondary stakeholders. The impact of a project may be such that its failure may affect the greater business activity. local communities. Although they are not closely tied to the project.128 Engineering Project Management Figure 8.3 Secondary project stakeholders The secondary group of stakeholders consists of those groups or individuals that are not directly related to the core of the project. they are part of a larger strategic business activity. They include groups such as the government.1 Primary and secondary stakeholder map. sponsors or financiers. and value creation and the ability to achieve the goals of the project. For instance. because they are integral to the project's processes. as some stakeholders are not keen to divulge information that is part of their competition strategy. there could still be uncertainty when the risks attached to the project are identified. Projects are rarely stand-alone activities for primary stakeholders. unions.

The inflationary impact of delays will require a rethink of the budgets. The impact of secondary stakeholders can have varying degrees of influence. or their by-products. The use of . 8. ensuring that a comprehensive enquiry was undertaken. It is expected that as a result of this process. The scheme involves 11 local authorities and a variety of local. This interest can either help promote or disrupt projects.4 Understanding the interests and influences The use of the stakeholder concept is related to an identification of the interest. influence and impact that lies with each stakeholder. The cost of this enquiry is expected to be approximately £100 million. The original business assumptions have also changed with regard to airline travel. rather than the limited period experienced by project managers or primary stakeholders. Secondary stakeholder influence can appear very early in the lifecycle of the project during the feasibility and approval stages. Legislative and regulatory actions have an impact on all projects. Projects have a direct impact on the environments in which they occur through their processes and end products. there will be considerable difficulty in ensuring that the original cost targets are achieved. and this requires a redefinition of some aspects of the business case for the project. but in the majority of cases it is disruptive. Tougher environmental controls with regard to waste disposal and management will have an increasing impact on engineering projects. The impact of secondary stakeholders goes beyond just the realms of government. This high-profile project has met a great deal of local resistance. The public enquiry on the proposed Terminal 5 facility at London Heathrow airport took 5 years. Visible engineering projects. all levels of government can exert considerable influence on projects through policy. All projects require approval at either local or national level. This case demonstrates how projects can be frustrated if there is opposition on any major scale by secondary stakeholders.Project Stakeholders 129 exercise a great deal of influence. The process of approval often requires consultation in a public arena. and can have a knock-on effect on the project's success. legislation and regulation. These activities take time. In some cases this may be supportive. national and international interest groups who are all opposing it. are of interest to the public at large. For example. A key factor in this behaviour is that secondary stakeholders often have to live with the outcomes of the project over its whole life-cycle.

changing public opinion. or facilitating or hindering the company with their social influence. Fortunes are often won or lost on the performance of a project. technologically advanced subcontractors and suppliers. The social impact is very often the forerunner of the political effects of stakeholders. The impact of external partners should not be underestimated as we adopt more cooperative approaches to project management. whereby it can influence market share. Another dimension for particular stakeholders may be their technological influence on the project. collaborators and joint venture partners would fall into both categories. and as more activity is out-sourced the greater is the potential influence of highly skilled. but not socially acceptable. its projects and its stakeholders will define this relationship. A good illustration relates to the decommissioning of the Brent Spar oil platform. Political influence followed by legislative capability can have a serious impact on projects. The value system of the sponsoring organisation. Changing technology can also add to the power of specialists. etc. The decommissioning project was technically feasible and cost-effective. Social issues normally end up on the political agenda. Greenpeace. by altering its position in society. growth. It acted as a rallying point for environmental interests and changed public opinion. morals and ethics present in any particular society. In turn. prices. There is the potential for social stakeholders to act as a rallying point for other stakeholders. The easiest dimension is the economic influence on the project. Particular stakeholders may have the ability to prevent or assist the project to have access to technology. subcontractors. In certain cases the firm may have the ability to influence the political . Consumer groups and environmental activists fall into this category. but this lacks tangibility and a degree of categorisation will help. as well as taking direct action to prevent the decommissioning. This is where the stakeholders may have an influence on the profitability. also galvanised opinion against the parent company. cash flow or risk profile of the project. and may choose to exercise the influence to a greater or lesser degree. The use of specialist services are very prevalent in engineering. Suppliers. The influence of society is highly dependent on the values. Some stakeholders may have a social influence on the organisation.130 Engineering Project Management the concept is directly related to the stake in the project. equipment or skills. This influence can potentially be strong if the technology is highly specialised and the stakeholder is in a monopoly situation. Project managers are unlikely to be able to influence these situations unless they identify the potential impact of stakeholders early in the project's life. the project may have an influence on stakeholders through its activities. All forms of government have this type of influence.

Project Stakeholders


process. Politically and economically powerful organisations can use their influence to change political opinion in order to facilitate their projects. In a similar manner they can use this influence to disrupt or block projects. These stakeholders with political influence can redefine the potential impact of change on the firm. The political stake has to be considered carefully, particularly for projects of a sensitive nature and when operating internationally. The management form of stake is often generated internally from the project organisation. This is the influence of the management philosophy and culture of the organisation, and it determines the systems, procedures, processes and values adopted by the company. In many ways this has a major impact on the relationships that exist between the project and its internal stakeholders. These relationships create the internal culture of the project. If a project operates in an environment of trust and cooperation, then it is likely that this will be continued externally. The culture of the project is a function of both its internal and external relationships. Collaborative working relationships benefit from having the appropriate culture within the project. If, for example, a project wants to operate in a non-adversarial manner, the staff being recruited should show that they can work in such a way and will fit into the culture of the project. The value system a company adopts internally continues externally, and therefore the internal values are important. A categorisation of interests allows us to understand the nature of the relationship between the stakeholder and the organisation. It also provides a means of looking at cause and effect in the stake, and provides a mechanism by which to address any issues that arise. This cause and effect in the relationship is important for any form of proactive management of stakeholders.

8.5 Stakeholder management
The process of identifying potential stakeholders in a project should be a major part of the strategic management process of all projects. This is a problem for the project manager, as the number and nature of stakeholders on a project will vary with the life of the project. As the project evolves, then the stakeholders and stakes change. It would therefore make sense to carry out this identification throughout the life of the project. Taking a project as the equivalent of an organisation, it follows that stakeholder management should form a major part of the strategic management process at the start of a project. Stakeholder management is an important part of strategic project management.


Engineering Project Management Project stakeholder management is the process of dealing with the people who have an interest in the project, with the aim of aligning their objectives with those of the project. A systematic approach to the project stakeholder management process is shown in Figure 8.2.

Figure 8.2 Project stakeholder management process (adapted from Cleland and King, 1988).

The first step in the process is to identify who are the potential stakeholders on the project. Using simple stakeholder mapping and identifying primary and secondary stakeholders can achieve this objective. Creative thinking is needed to identify stakeholders who have no obvious interest in the project. A failure to identify the widest possible scope of stakeholders may generate problems later in the project. The next step is to gather information about the stakeholders. This process is easy for public organisations, as they have information in the public domain that is easily accessible. Ad hoc or new organisations are difficult to research, particularly in a local context. Lack of information can lead to an underestimation of the potential impact of stakeholders. A small well-organised interest group may pose more problems if they have access to the media and political influence. The following step is to identify what the stakeholder's mission for the

Project Stakeholders


project is likely to be. For example, if Greenpeace is identified as a potential stakeholder, gathering information about how they work and what aspect of the project is likely to attract their attention provides the basis for determining what their mission could be. At the heart of all these missions is the project itself and how it impacts on stakeholders. It is useful to remember that where the project team sees opportunities from the project, other interests see threats. The next stage involves the determination of the stakeholder's strengths and weaknesses. This stage helps the management to understand how much the stakeholder can actually affect the project, what avenues they have available to make their needs known, and how far they will go to see them through. In such an analysis, it is best not to underestimate what stakeholders can achieve. The analysis of primary stakeholders may be easier as they want the project to succeed, but projects often run into problems by underestimating the capability of many secondary stakeholders. The best examples of this are environmental interest groups that have sophisticated organisations at local, national and international level. They have the ability to mobilise public opinion, have effective media management and good research departments, and can influence the political agenda, but they are often neglected in stakeholder analysis. The next step is to predict what the behaviour of the stakeholder will be and how it will affect the project's goals and objectives. It is best to develop scenarios for a variety of situations that may arise from stakeholder actions. These scenarios can be used to establish risk profiles as well as contingencies for particular outcomes. Not all outcomes will be supportive or beneficial for the project, and it is sensible to consider all possible situations. Once scenarios have been developed, the project manager can devise and implement stakeholder management strategies. In certain cases this would entail counteracting negative stakeholder behaviour. This may result in actions that force a redefinition or alteration of the project's objects, additional resource allocation, or simply in being more effective in communicating the project's objectives and its ultimate benefits. Even if stakeholder behaviour is supportive, it is still useful to remember that this interest in the project is important and provide the necessary support. Both disruptive and supportive behaviour should be considered. The process of stakeholder management will follow the project's lifecycle, as the stakeholders in a project will vary from one stage in the life of the project to another, and strategies may sometimes have to be revised. As illustrated above, this systematic approach helps the project manager to manage proactively rather than reactively, as it raises


Engineering Project Management awareness of the potential dangers of stakeholder action so that no-one is taken by surprise. An example of how project managers identified the potential of external stakeholders and acted accordingly for the benefit of the project is the Prince Edward Island Bridge project. The project managers on the Prince Edward Island Bridge project in Canada did foresee delays and consequent cost overruns due to the opposition of the fishermen and ferry companies. To make the project more attractive to investors, the promoters obtained a security package to guard against delay and cost overruns. One of the things that the package had was a US$141 million performance bond. This package helped the project to survive delays resulting from court hearings and about 70 environment impact assessment studies that had to be carried out. In this case primary stakeholders helped provide solutions that counteracted opposition from secondary stakeholders. Stakeholder management should lead to improved project objective achievement, while stakeholder neglect hinders it. The process of stakeholder management should also help to improve understanding of stakeholders and their motives.

8.6 Stakeholders and communication
The project manager is required to be an effective communicator and represent the interests of the project. Stakeholder identification shows that there is often a varied audience who is interested in the project. The project manager is now communicating to a wider audience. Communications to primary stakeholders will relate to progress, profitability, efficiency, timing and performance, as the primary stakeholder's interest is tied into the performance of the project. Strategies for communication with primary stakeholders will focus on their particular interests in the project, and may include personal briefings, newsletters, reports, meetings, workshops, and dedicated websites and intranets. The majority of primary stakeholders will look to the project manager to keep them informed about progress and performance. Secondary stakeholders present a more complex communication challenge because of the variety of their interests in the project. Communication challenges may range from representing the project at a public inquiry to a newspaper interview about the project. Stakeholder management allows the project manager to identify the interests of secondary stakeholders and tailor communication to respond to these interests. It is also imperative that any communication includes the

Project Stakeholders


broader project objectives and benefits. Concentrating only on the key interest of stakeholders may lead to the overall objectives being obscured. The tools that a project manager will use for communication to secondary stakeholders will depend on the circumstances of the information exchange. These may vary from a presentation at a public meeting to a press release. Communication skills have to include rebuttal techniques, as misinformation and negative communications will have to be managed. Stakeholders acting against the project may wage a negative information and media campaign. The internet has become the favourite medium for campaigns against projects. Projects can also be disrupted by direct action, protests, boycotts and strikes. The project management team has to be prepared for such situations. Stakeholder analysis should raise awareness of the likelihood of such situations and contingency plans should be prepared. There are situations where the project team may be faced with sophisticated and orchestrated campaigns against the project. In such circumstances, the project team should consider getting specialist help from either sponsors or external media specialists. As projects face greater scrutiny, project managers will have to acquire communication skills.

8.7 Summary
Projects do not operate in isolation; they are part of an open system. A project can change and influence its surroundings. Alternatively, the outcome of a project can be influenced by its surroundings. There is growing interest in projects because they have an impact on the broader economic, technological, ecological and social environment. This interest in a project may be either supportive or obstructive depending on how the project outcomes are likely to influence the environment. While supportive behaviour is encouraged, obstructive behaviour can present difficulties for the project. To gain better understanding of why there is interest in a project, it is possible to study how interests and influence may affect the project. A structured approach is required to consider these influences. Stakeholder identification and management help to identify and plan for the various influences that may impinge on a project. Having a systematic approach to stakeholder management allows the project team to prepare plans to accommodate or counteract such influences and to communicate with the stakeholders. A structured approach also allows for a deeper understanding of the motivation of stakeholders and the


Engineering Project Management actions they are likely to take. These could range from supporting the project to delaying or disrupting the project. As the power of stakeholders continues to rise, early planning is essential to manage this influence. Stakeholder identification and management recognises that projects operate in open systems, that external influences impinge on projects, and that projects also require an external orientation.

Cleland, D.I. and King, W.R. (1988) Project Management Handbook, 2nd edn, Van Nostrand Reinhold, New York. Freeman, R.E. (1984) Strategic Management: A Stakeholder Approach, Pitman, Marschfield, MA.

Further reading
Kanter, R.M. (1995) World Class: Thriving Locally in a Global Economy, Simon and Schuster, New York. Preece, C.N., Moodley, K. and Smith, A.M. (1998) Corporate Communication in Construction: Public Relations Strategies for Successful Business and Projects, Blackwell, Oxford.

Chapter 9


This chapter reviews some programming and planning techniques for the design, procurement, construction and commissioning of projects. The role of information technology is examined, together with suggestions on the identification and selection of appropriate software packages.

9.1 Planning
The successful realisation of a project will depend upon careful and continuous planning. The activities of designers, manufacturers, suppliers and contractors, and all their resources, must be organised and integrated to meet the objectives set by the promoter and/or the contractor. The purposes of planning are to persuade people to perform tasks before they delay the operations of other groups of people, in such a sequence that the best use is made of available resources, and to provide a framework for decision making in the event of change. Assumptions are invariably made as a plan is developed; these should be clearly stated, so that everyone using the plan is aware of any limitations on its validity. Programmes are essentially two-dimensional graphs, and in many cases are used as the initial, and sometimes the only, planning technique. Packages of work, usually referred to as `activities' or `tasks', are determined by consideration of the type of or location of the work, or by any restraints on the continuity of the activity. Activities consume `resources', which are the productive aspects of the project and usually include the organisation and utilisation of people (labour), equipment (plant) and raw materials. Sequences of activities will be linked on a time-scale to ensure that priorities are identified and that efficient use is made of expensive and/or scarce resources within the physical constraints affecting the job. A degree of change and uncertainty is inherent in engineering, and it



Engineering Project Management should be expected that a plan will change. It must therefore be capable of being updated quickly and regularly if it is to remain a guide to the most efficient way of completing the project. The plan should be simple, so that updating is straightforward and does not demand the feedback of large amounts of data, and flexible, so that all alternative courses of action can be considered. This may be achieved either by allocating additional resources, or by introducing a greater element of float and extending the contract duration, as necessary. In either case, the estimated cost will increase, and hence it is essential to link the programme with the cost forecast. It is difficult to enforce a plan which is conceived in isolation, and it is therefore essential to involve the people responsible for the constituent operations in the development of the plan. The plan must not impose excessive restraints on the other members of the organisation; it should provide a flexible framework within which they can exercise their own initiative. The plan must precipitate action and must therefore be available in advance of the task.

9.2 Programming
Programmes are required at various stages in the contract; when considering feasibility or sanction, at the pre-contract stage and during the contract. They may be used for initial budget control or for day-to-day implementation work. They may pertain to one contract, or a number of contracts in one large project. The planner must therefore decide on the appropriate level of detail for the programme and the choice of programming technique. Important factors in this choice include the purpose of the programme, the relevant level of management and the level of detailed required. Simplicity and flexibility are the keys; a programme of 100 activities is easy to comprehend, whereas a programme of 1000 activities is not. Often it is good practice to ensure that the number of individual activities should relate closely to the basic packages of work required, or to the cost centres defined in the estimate, and should all have durations of a similar order of magnitude. The period of time necessary to execute the work of an activity, the `duration', depends on the level of resources allocated to the activity, the output of those resources and the quantity of work. The duration may also depend on other outside restraints, such as the specified completion date for the whole or some part of the work, the delivery date for specific material or restrictions on access to parts of the works.

roads and railways. the logic and float are shown by dotted lines. as shown in Figure 9.1. Bar charts The most common form of plan is the bar chart. Each activity is shown in its scheduled position to give an efficient use of resources. The axes are the number of completed units and time: the work of each gang appears as an inclined line. also known as the Gantt chart. sources of materials from quarries and temporary borrowpits.3 Network analysis There are two basic forms of network analysis techniques: precedence diagrams. and important constraints or key dates are clearly marked. sometimes called activity-on-line networks.Planning 139 A number of common forms of programme used in engineering project management are reviewed below. and arrow diagrams. It is frequently useful to plot a period-by-period histogram of the demand for key resources directly under the bars at the bottom edge of the programme. the performance of individual activities will be greatly affected by their location and the various physical conditions encountered. the need to provide temporary or permanent crossings for watercourses. the erection of transmission lines or pipe-laying.3). and an example is shown in Figure 9. the inclination being related to the output of the gang. sometimes called activity-on-node networks.2. and is useful for any repetitive type of work. Although both methods will achieve the same answer. 9. The space within the bars can be used for figures of output or plant costs. the relative positions of cuttings and embankments. and the nature of the ground will all influence the continuity of construction work and the output achieved by similar resources of men and machines working in different locations (Figure 9. Line of balance This simple technique was developed for house building. Location±time diagram In cross-country jobs such as major roadworks. Restricted access to the works. the precedence . and there is room beneath to mark actual progress.

140 Engineering Project Management Figure 9.1 Construction of a bridge: programme in bar chart form. .

since logic is defined in two stages. The convention is that dependencies run from nose to tail of succeeding activities. use of pre-printed node sheets is possible. with activities being represented by egg-shaped nodes. that is from the finish of one activity to the start of the succeeding activity. It is the float which will later be utilised to adjust the timing of activities in order to obtain the best possible use of resources. asking `What can start once this activity has started?' and drawing the relevant lines.4 relates to the worked example below. The advantages of the precedence system over arrow diagrams are: o o o o o flexibility. Total . `Free float' is the minimum difference between the earliest finish time of that activity and the earliest start time of a succeeding activity. The `total float' associated with an activity is the difference between its earliest and latest starts or finishes. The network diagram (Figure 9. a characteristic which is called `float'.2 Line of balance. Figure 9. and the interrelationships between activities by lines known as dependencies.4) resembles a flow chart. diagram is recommended by the authors. overlapping and delaying of activities is easily defined. dummy activities are eliminated. revision and the introduction of new activities is simple. The dependencies are developed by moving to each activity in turn.Planning 141 Buffer Foundations Structure 7 a 6 b 5 Houses a 4 b 3 a 2 1 (*) Initial durations set at multiple of 5 days 0 10 20 30 40 50 Days 60 70 80 90 c f d g e c f g f Finishes 75 Assumptions: – hand-over every 5 days – 2 foundation teams (a-b) – 3 structural teams (c-e) – 2 finishes teams (f-g) – duration: 75 days Figure 9. Apart from the `critical path' a degree of choice exists in the timing of the other activities.

Reduce wing walls and abut to final levels 2 3 3. Re-open road ncing 1.3 Time location. Remove temporary fencing Engineering Project Management 4 Time in weeks 5 6 Reduce wing walls and abutments to final levels d Lower steelwork to roa ite offs el ste Burn up and remove 7 Remove temporary fencing Reopen road Excavate 8 Pier reinstatement Final grading and shaping 9 10 A Bridge span B C Clear site and demobilise D Figure 9. .142 0 Close road 1 Temporary fe Scaffolding Remove balla Break up an Remove scaf fold ck d remove de st 2.

float is a measure of the maximum adjustment that may be made to the timing of an activity without extending the overall duration of the project: free float is that part of the total float which can be used without affecting subsequent activities. a worked example based on a simple ten-activity network is described below. (1) (2) (3) Construct a precedence diagram assuming no resource restrictions and calculate the minimum duration of the project. To illustrate the techniques needed to perform the precedence diagram critical path method. Worked example Table 9. what is the effect on the critical path? Solution (1) Start with the first activity. at the left-hand edge in the centre of the pre-printed sheet. Because it is a start activity it has only successor activities.Planning 143 Figure 9.1 shows the durations and interdependence of ten activities required to carry out a project. Using the logic in Table 9. If activity F is extended to a duration of 15 days.1.4 Precedence diagram: worked example. A. Schedule the earliest and latest start and finish for each activity and show the critical path. the start of activities B .

This process is repeated until activity K is plotted. becomes the early start for D. In this example. By the same logic. The early finish for B is day 15. as in the majority of cases. This process is repeated. the larger value for the early finish from C. the late start is calculated by subtracting the activity duration from the late finish. Using the same logic but starting at activity K. The link between activity H and activity B is subject to an overlap of 2 days. and the process is then repeated. The forward pass continues until activity K is reached. the late finish is taken to be the same as the early finish.e. The process is then reversed to calculate the backward pass. i. i. and an early finish for the project is calculated as 36 days. the start of H can overlap the finish of B by 2 days. Hence the early start for activity A will be 0. Activity A B C D E F G H J K Duration (days) 5 10 12 4 8 10 10 4 5 1 Logic Depends only on the completion of: ± A A B and C C C E and D B (2 days) E and F H and G and J (2) and C is dependent upon the completion of activity A. day 17. but the backward pass would then not end at time period zero. a late finish is determined. The next step is to complete the forward pass. It should be noted that it is possible to insert a higher number as the late finish. day 5. The network should then be checked to ensure that there are no loops of activities.1 Network example. so these activities are plotted immediately adjacent to A. day 36. 0 + 5 = 5.144 Engineering Project Management Table 9. and so the early start for H is day 13.e. The early finish of A is then the early start of both B and C. The project will commence at the end of time-period zero. taking the lower value . as D cannot start until both B and C are completed. The early finish is calculated by adding the activity duration to the early start. and that there are no unconnected strings of activities. Activity D has two predecessor early finishes from activities B and C.

Change the durations of all completed activities to zero. an error has been made. the early finish of activity F is also extended by 5 days. (2) (3) (4) (5) . Introduce a new activity at the origin of the programme which has a duration equal to the time-interval between the start of the programme and the date of updating. The forward pass is continued to show that activity K now finishes at day 38. The procedure is described below. By extending the duration by 5 days. This is important as it focuses attention on the future. The difference between the late start and the early start is known as float. What has happened up to the present date must be accepted. This gives a critical path of A±C±E±G±K. Note that a completely new estimate of the amount of work remaining to be done should be made for each `live or future' activity at each update. When the backward pass is completed. The new critical path is A±C±F±J±K. Activity F is not critical. A number of activities. and it has a float of 3 days.4 Updating the network Updating should be done frequently to ensure that the network is relevant. Unless this value is also zero. Calculate revised durations from the date of update for all live activities and all future activities. The revised activity duration is derived from this figure. (1) Identify and mark all activities on which work is currently proceeding as `live' activities. including the start activity and the finish activity. it is shown that there is a new critical path and changed float durations for non-critical activities. Evaluate the programme in the normal way. Each activity will now have an earliest and latest start and an earliest and latest finish. an extension of 2 days. 9. will have identical early starts and late starts.Planning 145 (3) on the backward pass and adding overlaps until a late start for activity A is calculated. taking into account any changes in requirements or actual performance. The critical path or paths consists of the activities with zero float logically linked between the start activity and the finish activity. and a reassessment value of the probable output of the relevant resources. and concentration must given to replanning and scheduling future activities.

although in practice it is realised that there may be a range of values for these parameters. the greater the extension of the completion period of the project when it is `resource scheduled'. It is probable that few scheduled activities will offer float. usually known as `resource levelling' or `smoothing'. Once the key resources have been adjusted. If the float available within the programme is not sufficient to adjust the activities. This is known as `resource aggregation'. with the assumption that the resource demands for each activity can be met. The data for this have usually been derived using the most efficient sizes of gangs and the normal number of machines. a new completion date results. The next step is to consider the total demand for key resources. there will be competition between activities for resources. Bar charts have then been drawn using earliest start dates and showing maximum float. deterministic values for duration and cost. If this is not acceptable. and the duration of the project is then extended. The lower the limits placed on resources. a precedence network has been constructed. It is clear that the levelling of one resource will have an effect on the usage of others. utilises the project float.146 Engineering Project Management 9. Most planning techniques inevitably use single-point. The next stage. In consequence. When considering the project or contract as a whole. 9. the resource limits must be adjusted and the process repeated. In some cases it will still not be possible to satisfy both the restraints on resource availability and the previously calculated earliest completion data.6 Planning with uncertainty The planner is often faced with a degree of uncertainty in the data used for planning. When resource scheduling has produced a satisfactory solution. resource levelling is usually only applied to a few key resources. thereby altering the individual activity durations. and the demand may either exceed the planned availability or produce a fluctuating pattern for their use. the planner could consider the resources given to each activity and assess whether the usage can be changed. . Float can be used to adjust the timing of activities so that the resource limits imposed and the earliest completion date are not exceeded.5 Resource scheduling In the initial stages of planning a project. the start and finish dates for each activity are said to be their `scheduled' values.

managing multiple projects. but will provide generic guidance on the selection and utilisation of software packages for project management. offering a wealth of features to cater for a varying range of project types and project management styles. In considering the purchase of project management software. In all cases it causes the planner to adopt a more statistical approach to the data.Planning 147 There may be times when it is more appropriate to consider the uncertainties of the project.7 Software and modelling The increasing commercial pressure to achieve predetermined time and cost targets. this technique can be of assistance in the early stages of planning. The mechanics and logistics of multi-value probabilistic models eliminate manual calculations on all but the simplest of construction programmes. When using such techniques. the planner is probably forced into using a computer. and allow the project manager interactively to forecast the financial commitments for the project and to assess a range of scenarios to reflect likely change and uncertainty. ranging from the simple techniques of using pessimistic. cost and the resources of the project. Full details of the technique can be found in many standard texts. through sensitivity analysis. but all are designed to serve the same purpose. combined with the power of the desk-top computer. while collaborating in a team-based . optimistic and most likely three-point values. One planning technique not necessarily requiring such powerful computation tools is the decision-tree approach. Used as a means of judging between decisions. These programs vary widely in terms of their modelling flexibility and simulation options. with the need to prioritise and manage resources across projects. Project management software ranges in cost from the hundreds to thousands of pounds. All programs link time. has led to a proliferation of project management software packages. and focuses attention on the uncertainties in the project. This section will not consider individual commercial software products in detail. 9. to the more sophisticated Monte Carlo random sampling method. which is to provide project managers with the power to plan the time and cost outturn in projects. There are a number of ways in which this can be achieved. the first criteria should be the intended use. One end of the spectrum may be characterised by project management teams.

the availability of a given project management software package on your platform of choice could be a limiting factor. and constraints thereof. Activity modelling In general. should also be checked. Support for customising project diagrams varies between packages. . At the other. and organisation breakdown structures (OBS) that allow responsibility for activities to be assigned to departments. functions or workgroups. or favour APPLE Macintosh computers.148 Engineering Project Management environment. the types of activity. one should check for constraints on the number of activities per project. The key features of a given software package may be grouped and evaluated under the headings of activity modelling. the links per activity. usability and costs. the operating system which the software must support should be established. is the stand-alone project manager. formatting features and support for annotations should be evaluated against your needs. particularly if it is intended to model large projects. and filtering and layout options. a good package will offer automatic recalculation of the critical path. With network diagrams. analysis tools. Hence the evaluation of the matrix of features and functions on offer in any given project management software should be done in the context of the perceived need and potential future requirements. resource handling. In reviewing the activity modelling features. The pervasive nature of the Microsoft operating systems may make this appear to be a moot point. and activity durations based upon changes to resource allocation and other variables. Also check whether the package offers graphical-tree editors to support the creation of breakdown structures. In drawing up a short list of software to evaluate. but should you be among the new wave of LINUX users. check for constraints on the number of levels that project activities can be grouped under. and even the characters in activity names (some packages allow comprehensive descriptions). with fewer activities and resources. These typically take two forms. Some packages enable tasks/activities to be grouped logically in breakdown structures. allowing projects to be modelled using network diagrams or Gantt charts. project management software provides facilities for activity (task) definition. managing a single project. integration options. Other organisational features such as the use of sub-projects. as these can vary from as few as 10 to as many as 999. If these features are of interest. work breakdown structures (WBS) that group activities under summary headings.

etc? How are holidays modelled? Can shift patterns be customised? Analysis tools At the very least. Project management software typically uses calendars to define resource availability and usage. allowing the definition of optimistic. It is important to understand how these features are implemented. and whether an activity is resource-constrained (trying to use more than is available). Check that the maximum number of scenarios that can be saved meets requirements. as they allow you to generate project reports that focus on relevant aspects of the project. human). ranging from cost management functions. sorting and annotation . cash flow forecasting and wastage analysis. or as consumable. Any good package should be able to reschedule projects to overcome resource constraints. number of hours in the day. and ensure that the techniques used are compatible with one's requirements. and the software determines resource usage per activity. Defined resources can then be assigned to activities. Packages also offer `what-if' analysis features that allow projects to be versioned. so that the probability of completing the project within a given time-frame can be ascertained.Planning Resource handling 149 Project management software packages should support the definition of resources (material. some packages will allow `efficiency factors' (coefficients to weight the effort required. most likely and pessimistic durations for activities. In considering such features. such as earned value calculations. a good project management software package should support probability analysis via PERT network diagrams. revised and compared with the original. equipment. others allow resources to be modelled as partially available. detail its availability and associate with it a cost or rate. and provide resource levelling and smoothing routines to maximise resource use. Ensure that the software supports the kind of reports you need. Also review the customisation options: good filtering. Reporting tools are also of great importance. one should check that the facilities are flexible enough for one's needs. and should allow you to quantify the resource. as they vary between packages. Many packages come with more sophisticated analysis tools. based on the skill of the resource) to influence the scheduling outcome. Does the package allow you to define your own working week. to Monte Carlo method-based probability analysis. one should remember to review the implementation details. For instance.

For instance. For enterprise-based users. spreadsheets. and ensure that only authorized users have access to appropriate project data. Are menus intuitive? How easy is it to navigate through the menus? Can one quickly zero-in on the desired action? How easy is it to specify the properties of activities. and should be checked against your needs. personal information managers (PIMs) and the internet. presentation tools. allowing easy publication on the internet. and can exchange data between spreadsheets and databases. The level at which the mechanism locks data. However. Integration options In today's world nothing is done in isolation. the ability to print large network diagrams on large sheets using pen plotters may be attractive. Thus. project. varies between packages. resources. many packages allow the information in PIM calendars to be imported into resource calendars. integration with accounting and enterprise resource planning (ERP) systems should also be considered.e.150 Engineering Project Management facilities can vastly improve the quality of reports. in evaluating the ease with which a project management software package can be used. while others may require the use of a third-party tool. i. All such environments offer a locking mechanism to prevent multiple users changing the same data at the same time. A print preview option should be considered a must. in evaluating project management software. Usability The advent of the graphical user interface (GUI) can make all tools look the same at first glance. Others can publish reports in HTML. The ability to export charts and graphs directly to your presentation package will be appreciated when attempting to meet that looming briefing deadline. one may wish to consider some of the following criteria. task or resource. which allow multiple users to work on the same project. A project manager will employ not only project management software. Also check on the printing peripherals the package supports. word processors. etc? Are there any wizards (automated guides) for common tasks? Can I . The more sophisticated packages come with collaborative environments. Also remember to consider how the collaborative environment will integrate with your current security policies. Some packages offer native interfaces to these systems. consider how the package will integrate into your existing environment. but also e-mail packages.

etc. In considering costs. others offer e-mail-based support..Planning 151 customise menus to my needs? The easiest way to evaluate these criteria is by actually using the software.F. but also the total cost of ownership. Some vendors offer manned help lines. save projects. acceptable? Costs Beyond the analysis of features and functions. what will these cost? Will new hardware need to be bought? What happens when new versions are released? Are you entitled to them. What are the service and maintenance costs? If training courses are required. Further reading Antill. What is the process for reporting bugs and getting bugs fixed? Make sure you are aware of the potential time-lines. and Page. remember to check the performance characteristics of the software. many vendors will provide evaluation versions (typically time-bombed to stop working after a set period of time) for this purpose. one should look not just at the sticker price of the software. is the software package affordable. M. Also enquire as to the degree of technical support you can expect from the vendors. It is important to evaluate the help facilities associated with the package. R.M. For example. investigate the reliability of both the software and the vendor. (1987) Management for Engineers. C. Wiley.B. Alongside all this. hard disk space and memory) does it require? Does use of the software require an expensive. untimely upgrade of your current machines? Did you find the time to open projects. under your current purchase (subscription)? Or will you have to factor-in upgrade costs? By addressing the total cost of ownership alongside the features required. Quite simply. the project manager will be well equipped to make a decision on which project management software to invest in. (1982) Critical Path Methods in Construction. 3rd edn. Wiley. Cooper. Inspect the user guides for clarity and depth. Chapman. London. J. . Product reviews and user groups can easily be found on the internet.. what minimum hardware specification (processor. and Woodhead. create activities.J. there is the question of cost.W. London. D. The presence of tutorials and `How do I' sections can be useful.

A. E. Produce a programme for the project.W. and an existing drain requires diverting. blocks A. fencing and screening will complete the site. blockwork Finishing trades Five-storey block: Excavation. Wiley.152 Engineering Project Management Smith. foundations Concrete frame Brickwork Finishing trades Site establishment Drain diversion Completion of main drain Drain connections 120 150 150 250 190 300 350 500 man-weeks man-weeks man-weeks man-weeks man-weeks man-weeks man-weeks man-weeks 4 men 6 3 weeks 30 man-weeks 24 man-weeks.1 New housing estate A new housing estate comprising four blocks of low-rise flats. foundation 40 man-weeks Brickwork 120 man-weeks Carpenters 30 man-weeks Finishing trades 70 man-weeks Shops and maisonettes: Excavation. connections to main drain . Flats A and B to be completed as early as possible. 300-mm-diameter drain 40 man-weeks. B. foundations Concrete frame Brickwork.. and resource-level the programme for (a) bricklayers. C and D. (1983) Civil Engineering Systems. and Lewis. New water and sewerage systems are required. and a shops and maisonettes complex. A. London. Exercises 9. Attractive landscaping. and (b) total labour. Restraints Target completion: 82 weeks. Resource demand Flats. per block: Excavation. a block of five-storey flats. R. Hinton. Shops and maisonettes not required until all other work on site is completed.

each providing a suitable flange and anchor for test purposes.2 Pipeline 60 man-weeks 50 man-weeks 75 man-weeks 20 man-weeks 80 man-weeks. but cannot become operational until water is available. Pipes are available at a maximum rate of 1000 m per week (commencing week 1). respectively.Planning Roads. Water for testing will be supplied free by the promoter following completion of the pumping station during week 33. Each stringing gang can handle 1000 m per week. . 150-mm-diameter ring main 100 man-weeks 153 The contract comprises the laying of two lengths of large-diameter pipeline with flexible joints 16 km from pumping station A to reservoir B. The reservoir will be commissioned during week 35. There is a continuous outcrop of rock from chainage 10 to chainage 13 km. 18 and 22 km. and 8 km from B to an industrial consumer C. Testing and cleaning each 3-km length will take 2 weeks. 7. Isolating valves are to be installed at the ends and at 3-km intervals along the entire length of the main. The contractor is responsible for off-loading from suppliers' lorries. A river. 9. Because of access problems. 13. rail or road crossing is estimated to occupy a bridging gang for 4 weeks. Attention should be paid to manpower resources and continuity of work. and special river. Produce a time±location programme for the contract on the assumption that one stringing gang and four separate pipe-laying gangs are to be employed. Determine the earliest completion date and mark the critical path. 1st phase Road surfacing Paths Fences and screens Water services Landscaping 9. pipe-laying and stringing gangs should not be operating concurrently in the same 1-km length. storing and stringing out. The average rate of pipe-laying per gang may be taken as 300 and 75 m per week per gang in normal ground and rock. The industrial plant will be completed by week 40.3 Industrial project (a) Construct a precedence diagram as the master programme for an industrial project using the logic and estimated duration given in the table below. rail or road crossings are to be constructed at chainages 2.

7. Promoter's brief Feasibility study Promoter considers report Land purchase Site investigation Design stage I Design stage II Civil tender documents Specify mechanical plant Mechanical plant tender Civil tender Specify electrical plant Electrical plant tender Manufacture mechanical plant Design stage III Design stage IV Manufacture electrical plant Construction stage I Construction stage II Install plant Test and commission Duration (months) 3 18 12 12 4 6 4 3 3 4 2 3 5 18 4 4 20 6 12 6 3 Precedence activity Ð 1 2 3 3 3 5.8 9 12 10 7. 20. 14. which two tenders would you recommend? .154 Engineering Project Management Activity 1.18 19. 9. (b) The tenders for the electrical and mechanical plant have been received and are as follows: Plant Electrical A Electrical B Period of manufacture (months) Cost £444 000 £600 000 £600 000 £700 000 } Activity 17 } Activity 14 20 16 18 16 Mechanical C Mechanical D If the promoter's profit is estimated to be £50 000 per month from the date of completion.11. 13.15 16. 19. 15.18 14. 3. 21. 5. 11. 17. 10.10 13.6 5.16. 18.17.6 6 9 7. 12. 16. 6.15 13 4. 4. 8.20 Estimate the float associated with activity 16. 2.

showing the critical path and the earliest completion date. evaluate the effects of reducing the duration of pile-driving to 5 weeks. (2) (3) Suggestions for answers to these exercises can be found at the back of the book. As (1). By considering the network produced in (1). produce networks for the construction of the bridge shown in Figure 9. .Planning 9. one concrete team for abutments and piers. one concrete team for foundations. Evaluate the network. The total resources available are one excavation team. but assume that the resources are heavily constrained. (1) Produce a network assuming that unlimited resources are available. Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Description Set up site Excavate left abutment Excavate left pier Excavate right pier Excavate right abutment Pile-driving to right pier Foundations for left abutment Foundations for left pier Foundations for right pier Foundations for right abutment Concrete left abutment Concrete left pier Concrete right pier Concrete right abutment Place beams for left span Place beams for centre span Place beams for right span Clear site Duration (weeks) 1 6 4 4 6 7 8 6 6 8 9 7 7 9 4 4 4 1 Resource demand Excavation Excavation Excavation Excavation Concrete Concrete Concrete Concrete Concrete Concrete Concrete Concrete Crane Crane Crane Crane This exercise is in three parts.4 Bridge 155 Using the precedence diagram method.1. before the index. and one crane team.

meaningful reports provided in an efficient and timely manner. change the functionality or seek an alternative. but it may be the preferred option if it can be clearly demonstrated that it will benefit the project.g. change requests. change the plan. 10. The model here has to be plan±do±review. so that any necessary actions can be taken and the status of the project reported to senior management. and then to explain and discuss the system of earned value that is now used by a number of organisations. The section on earned value covers all aspects of the approach. including schedule controls.1 Project control The purpose of project control is to ensure that the project's status is reported in a consistent. a process must be put in place to control change. in a variety of situations. The role of the project manager is to: 156 . although this has the inherent problem that future measurements will be against a new base-line. refer on if the change lies outside the control of the project team. either the scope or the method of execution. change the quality. To do this.Chapter 10 Project Control Using Earned Value Techniques The purpose of this chapter is first to describe project control theory in general. change the work. e. In addition. cost-effective and timely manner to the project manager. from definition to application. the project manager will need to hold regular meetings with the project team and have regular. budget controls and re-plan. The `do' component could take any of the following forms: o o o o do nothing if the work is progressing as planned.

internal measurement procedures. they also need to be clear about the need for the information that they are providing (that it is not just more bureaucracy) so that they do not feel constrained by the reporting system. 10. ensure that costs are properly allocated. work performed and costs incurred. external audits. Although they do need feedback on how they are performing. This has to be balanced by the needs of the project team. ensure that payments are authorised as appropriate.Project Control Using Earned Value Techniques establish the system. using feedback to update and revise the plan on a regular basis. and compares actual data with a baseline plan set at the beginning of the project. then `information overload' can be avoided and the reports should be timely. known as the C-Spec. This takes the work planned to have been done and the budget for each task. allocate responsibilities. there will be a brief description of the planning and control cycle (Figure 10. This can be monitored by: o o o o 157 o o o o obtaining regular. This takes the work that has been done and the . and indicates the portion of the budget planned to have been used. the United States Department of Defence published a set of cost/schedule control system criteria. This chapter describes how the earned value system analyses each of these components independently. when there is a clear deviation from what is expected. If the focus is on reporting by exception. Previous management control systems assumed a direct relationship between lapsed time. verbal reports. however. First. progress reports.1) which forms the basis of the methodology for controlling project costs.2 Earned value definitions Earned value analysis (EVA) compares the value of work done with the value of work that should have been done. In 1967. The cycle consists of monitoring actual performance against a plan. These criteria define minimum earned value management control system requirements. Budgeted cost of work performed (BCWP) is the value of the work done at a given point in time. Budgeted cost of work scheduled (BCWS) is the value of work that should have been done at a given point in time.

budget for each task. Actual cost of work performed (ACWP) is the actual cost of the work done. Figure 10.158 Engineering Project Management Figure 10. and indicates what portion of the budget ought to have been used to achieve it. A negative number implies a current budget overrun. Schedule variance (SV) is the value of the work done minus the value of the work that should have been done (BCWP 7 BCWS).2 illustrates a typical S-curve plot comparing budget and actual costs. A negative number implies that the work is behind schedule. .1 Planning and control cycle. Cost variance (CV) is the budgeted cost of the work done to date minus the actual cost of the work done to date (BCWP 7 ACWP). A negative value implies that the project is over budget. Variance at completion is the budget (baseline) at completion (BAC) minus the estimate at completion. Productivity factor is the ratio of the estimated man-hours to the actual man-hours.

and hence total time and cost.2 Typical S-curve.3 The theory and development of earned value analysis S-curves examine the progress of the project and forecast expenditure in terms of man-hours or money. If percentages are used. since size. Values under 100 indicate that the project is over budget. Schedule performance index (SPI) is (BCWP/BCWS)6100. The form of the S-curve is determined by the start date. or the value of the work done. 10. the development of useful data from historic records of past projects is simplified. Once a . the end date and the manner in which the value of the work done is assessed. All projects. are plotted against the same parameters.Project Control Using Earned Value Techniques 159 12 000 BCWS BCWP 9600 ACWP Time now 7200 Cost 4800 2400 0 0 1 2 3 4 5 Time 6 7 8 9 10 Figure 10. and then characteristic curves can more readily be seen. is not significant. The result is compared with the actual expenditure as the project progresses. Cost performance index (CPI) is (BCWP/ACWP)6100. Values under 100 indicate that the project is over budget or behind schedule. whatever their size.

money and the shape of the S (known as the route). including the additional indirect costs associated with parallel activities. The hours that have been booked can be evaluated at an average rate per man-hour. A low cost estimate often leads to a low estimate of the time required to carry out the work. and it is applied to the estimate of additional man-hours by taking into account the indirect costs for the whole of the variation. Materials are delivered against a firm order. including monitoring. then what the percentages are based on must be carefully defined. These curves have been derived empirically. The route is as much a target as the final cost. Influence may be applied whenever there is a variation. If the movement from month to month is compared. A series of standard S-curves has been developed by companies in the oil and gas industries so that the performance of existing projects can be monitored. i. can be developed so that certain aspects of the project can form the focus of attention. that rate being the actual costs for the project. then the trend can be derived. They are not always used in the pure form.3). If the axes of the S-curve are expressed as percentages. The assessment and precise recording of the value of the work done is crucial to project cost control. The establishment of realistic targets is very important if the analysis is to be meaningful. Developments have been made from using the S-curve simply as a method for controlling the progress of the project to using it proactively in the evaluation of indirect costs associated with project changes introduced by the promoter. If review estimates are made at regular intervals. then only two variables are left. Since the expectation is that the route is fixed. reporting and payment. The revised estimated cost of the variation may then be issued to the promoter.160 Engineering Project Management consistent approach has been established and the historical data analysed. These curves have been put to a number of uses. further curves. For example. The influence is composed of: . This method is known as `impact or influence' (Figure 10. The immediate target is not the final target.e. then the value of the work done will always be a percentage of the latest estimate. This is described by accountants as `work in progress'. such as productivity factors. design man-hours are usually measured weekly. so normally an order value is available. investigations ensue to identify the source of the discrepancy. and when projects within certain categories do not follow the norm. there are three significant variables that need analysing: time. Revision of the estimate automatically revises the route of the S-curve.

o o o o o o time lost in stopping and starting current activities in order to make the change. T ˆ V…1 ‡ IF† where V is the direct cost of variation. 10. special handling to meet a previously scheduled activity. Influence is incorporated by multiplying the direct cost for the variation by the influence factor and adding this to the direct cost to give the total cost for the change.Project Control Using Earned Value Techniques 161 110 100 90 Design progress (%) 80 70 60 50 40 30 20 10 0 0 20 3% 7% 40 60 Job duration (%) 15% 55% 53% 42% 27% 42% 30% 20% 10% 3% 80 100 0 120 Approximate technical manpower: May vary by job (determined by design co-ordination) Manpower peak Design progress Technical design manpower (%) 100 50 Figure 10. Cost planning involves forecasting how money will be spent on a project in order to determine whether the . IF is the influence factor and cost is the cost to the promoter. revisions to project reports and documents. recycling (lost effort on work already produced). other costs which may not appear to be related to a particular change.3 Influence curve. Any organisation wishing to adopt this approach would need to derive standard curves.4 Relationship of project functions and earned value Monitoring and cost control can be described as identifying what is happening and responding to it. unusual circumstances which could not be foreseen. T is the total cost of variation.

162 Engineering Project Management project should be sanctioned. although not the only. provides a ceiling at any time during the project's life. Finance will also be responsible for maintaining a record of commitments. Similar S-curves may be developed for both commitments and expenditure. and having sufficient money available when required.4. Planning is primarily responsible for establishing the time target. Finance will maintain expenditure records. . working closely with project cost control. Project control can comment on the validity of planning work by comparing planned and actual progress via the value of the work done. if properly maintained. there are three major areas of control: commitments. since they have to ensure that payments are within the approved limits. Typically. both overall and in detail. task of project cost control is to establish the exact position of the project from one time period to another in terms of the value of the work done. value of work done and expenditure. which presents a typical S-curve for the value of the work done. The primary.4 S-curve showing the value of the work done. 100 Planned progress 80 Project cost (%) 60 40 20 0 0 2 4 6 8 10 12 14 16 18 Time 20 22 24 26 28 30 32 34 Figure 10. and compare this with the targets for each time period. as shown in Figure 10. The commitment record. These are all controlled in relation to their progress over time and may be illustrated diagrammatically.

Head office Work done at head office includes design. materials delivered to the site and erection.5 Value of work done control The value of the work done is not the expenditure. The work done can be measured in man-hours. Figure 10.Project Control Using Earned Value Techniques 163 10. procurement and project supervision activities. Figure 10. although it eventually equates to expenditure. The value of the work done can be summarised as design and head office costs plus the value of the material delivered to the site and the work done at the site. The techniques for reaching an approximation of the value of the work done from month to month can be related to three major areas: head office.5 illustrates the relationship between value of the work done and the expenditure as recorded over the life of a project. . It is often considered as work in progress. There is normally a considerable time-lag between having a project ready for start-up and the final payment of invoices and retention when the project is completed in financial terms.5 Comparison of work done and expenditure. but most of the time it is greater than the expenditure.

but this time the value is erection man-hours. resulting in the approximation being only one month behind the actual cost at that time. Many of the current reporting procedures were developed by the US Corps of Engineers. and the value of the work done is then assessed. As materials arrive on-site the materials receipt note can be valued. where man-hours and material deliveries to the site are used to monitor projects from inception to completion. A correction can then be made. freight charges. Since the value shown on the order may not be the absolute invoice value. exclusive of site supervision. then that is compared with the cumulative cost including the last month's estimate. Erection man-hours. If the latest cumulative booked cost comes perhaps 3 weeks later. it can be very time consuming to value all items on a receipt note from the itemised prices on an order. for reasons such as discounts. Materials delivered to the site Materials are normally delivered to the site against firm orders so that an order value is available. and a progressive total can be maintained. using the information on the order. 10. this approach gives a nominal and close approximation of the value.164 Engineering Project Management and is usually recorded on a weekly basis. Such evaluations often run late so erection man-hours worked are often valued on the basis of standards multiplied by the average rate per hour which is applicable to the erection activity. . should be recorded from week to week.6 Earned value analysis techniques Earned value analysis (EVA) is often presented in the form of progress. EVA has been adopted by the oil. manufacturing. In the case of bulk materials. Erection The approach to erection contracts is very similar. and it is often permissible to use a weighbridge weight multiplied by an average price per kilo calculated from the order or orders. Hours booked are valued at an average man-hour rate. The simple way to do this is on a cumulative basis. for all contracts on site. insurance or escalation. productivity or S-curve diagrams. Progress on site by various erection contractors is measured by teams of schedulers or measurement engineers in accordance with certain standard methods of measurement to allow progress payments to be made. gas and process industries.

productivity is always unity. The productivity factors are used by both promoter and contractor organisations to monitor the progress of a project and forecast the outcome. Man-hours To date Estimated Actual Total Estimated Revised 360 000 295 000 500 000 440 000 Units 4750 4900 6000 6000 . or less. Productivity factors are used to monitor variance and trends for individual activities. Once it becomes evident that a work package is going to cost more.1 Progress of value of work done.Project Control Using Earned Value Techniques 165 Actual/estimated man-hours are made available to determine the progress and productivity factors at any stage of the project. then targets should be revised.1 illustrates a typical `progress of value of work done' chart. time and productivity of the completed item can be identified. Since the forecast progress depends upon the end target. the potential influence on monthly progress evaluated and a new target computed. In cases where production is carried out at a number of locations with final assembly at one specific point. than the original (or earlier) estimate. Table 10. In order to establish a trend actual progress must be measured and compared with forecast progress. and provides a measure of efficiency. man-hours are used as the common unit to determine productivity. If a bottleneck occurs at any point in the production line the affect on the costs. with both the output and the input measured in the same units. it is imperative that any deviation from the activity S-curve is reported immediately and acted upon. The revised number of man-hours is forecast against the actual work completed. Table 10. expressed in both man-hours and completed items. that being the base-line S-curve. Ideally. This information often is displayed on a screen to manufacturing operatives as a guide to production rates and the time to completion. Productivity is the ratio between output and input. In the oil and gas industries. revised targets will influence the progress which must be made each month. which is common to many manufacturing industries. and is based on progress and productivity.

if they do not realise that it will be used for control and not just for monitoring. and as such. rather than optimistic or pessimistic forecasts based on `gut feeling'. In many cases. 10.7 Application of EVA The information required from an analysis of the curves will vary depending on its end use. The hours expended from the `float' of man-hours is then used to forecast the final costs. It is also important to note the percentagecomplete status of a task at the recording date. times and margins. Work packages. can be examined and the productivity can be derived. Productivity increases or decreases will permit management decisions based on actual measurements. check its accuracy and take action when low productivity becomes apparent. re-working is analogous to commissioning. The team leader should ensure the progress of the work of his section. or sets of work packages. resulting in erroneous data. may not be allotted targeted man-hours in the project estimate. In a number of major process organisations in the oil and gas industries. This is where a proactive role is required by the project management team in gleaning information from the various disciplines. If the curves are showing cause for concern. with the planners taking a recording and reporting function. The team leaders of various disciplines must be aware of the significance of the information they are reporting and why it is being recorded. This `man-hour float' is often the determinant for price setting to the customer for each model. Mercedes Benz. especially automobile assembly lines. man-hours are allocated for re-working items to meet quality and standards. reportedly spend up to 30% of the total man-hours allotted to re-working to meet defined quality and standards.166 Engineering Project Management In many manufacturing industries. This can be done by examining the BCWP and ACWP curves. Cost codes for both direct and indirect costs will need to be considered on the basis of compatible codes allocated to different work packages. then productivity curves can be plotted and examined in greater detail. the aim will be to identify any areas where the project is under-achieving in order that action can be taken to improve the performance of the problematic resource. At project level. for example. as described earlier. for example. A project manager can adopt this system through the analysis of completed time sheets. they may not give it a high priority. then the project team must actively pursue information. Optimum workforce requirements will become apparent as data for specific projects are collated. the number of multi-disciplinary functions and development . If progress is to be expedited.

. it is standard procedure to book additional man-hours against the contract code. The S-curve is prepared on the basis of estimated man-hours. In cost-plus contracts. a design engineer is allocated 40 h per week on. To achieve the introduction of EVA. The effort required at project level to undertake EVA is such that it is not recommended for `small' projects. then it is difficult for the project manager to set realistic targets. against which the actual man-hours expended to complete each work package and the overall project are plotted. thus invalidating the approach. the effort required to gather and process data on the progress of small-value items may be greater than the value of the package of work. then the management team must be fully dedicated to implementing the system. The actual man-hours expended are then plotted on a regular basis to determine the variance in man-hours and the productivity factors.2 illustrates the historical data of a typical six-package project. the remaining man-hours are often distributed between the project codes. say. Ideal costcoding systems are those that allow the system to be used at all stages in the development of a project. A standard reporting technique should be developed for all projects so that a given productivity rate means something. a basic requirement is the collection and processing of data related to existing and past projects.6 illustrates the S-curve for the prototype work package shown in Table 10. Estimated man-hours are often based on historical data from completed projects. then the remaining 8 h must be reconciled somewhere within the organisation. three projects and only 32 h are recorded. If the decision is made to adopt EVA for a given project. The importance of developing standard curves cannot be over-emphasised. These data form the basis for estimating and allotting man-hours to each activity or work package. The proportion of the inaccurate part of the assessment of the work left will also be greater. and to forecast the work package trend. One very important aspect of coding and recording man-hours is the comparison of man-hours expended against a code or codes and the remaining man-hours expended as overheads.Project Control Using Earned Value Techniques 167 stages of a project have led to confusion about the cost codes. Below a certain size. If.8 Examples of EVA Table 10. for example. If there are no standard curves.2. Unfortunately. resulting in inaccurate data and delays in transmitting data for analysis. Taking action on inaccurate data can be worse than taking no action at all. 10. Figure 10.

Work package Feasibility study Design Prototype Manufacture Erection Commission Actual man-hours 550 3000 1500 2300 900 300 Estimated man-hours 450 2500 1700 2200 600 300 Productivity factor 0.13 0. EVA has been used primarily to monitor the construction of individual units and as a reporting tool to both construction management and the promoter. The cumulative man-hours are plotted in the form of an S-curve and progress is monitored as man-hours are expended. bar charts are prepared from which histograms of manhour estimates for each construction activity are generated. man-hours and productivity factors.82 0. usually plant hire rates.6 S-curve for prototype work package.83 1. In its simplest form. for specific types of plant/activity usage.96 0. The type of plant and estimated Figure 10.168 Engineering Project Management Table 10.2 Work packages.00 On a number of civil engineering projects. Plant usage is often added to man-hour schedules based on weekly costs. .66 1.

5. for example. as this does not assume anything about the accuracy of the estimate or when the work package started.Project Control Using Earned Value Techniques 169 usage often form the basis of plant allocation for a number of projects. then the saving in manhours can be utilised on another construction unit. managers prefer to rely on the `remaining duration' as a good measure of progress for a work package. as illustrated by the S-curve. then additional plant time and usage will be required to reverse the trend. A major problem area is the accuracy of reports of percentages of work completed. The saving in manhours and plant usage and the reduction in duration can then be plotted as actuals against the estimated S-curve. In addition. If. then completion would require another 4 weeks and an additional 480 h based on the previous productivity factor. as it is normally very difficult to acquire plant at short notice. In many civil engineering contracts. If. work is normally performed in controlled environments where it is a simple task to measure the physical work done and the materials used. often on a daily basis. and always kept up-to-date. the number of man-hours both estimated and expended on a number of activities. In these industries. EVA is also used in the manufacturing and production industries to monitor production rates. This approach also ensures that the manager is aware of the remaining duration to meet any contractual milestones. and will act accordingly. This is often referred to as the `persistent 99% complete syndrome'. delivery dates can be identified at an early stage of the project. As a result. The diagrammatic presentation facilitates the comparison of actual man-hours expended in construction with the man-hours estimated. especially where the delivery of an item is paramount to the success of a project. The cumulative man-hours expended for . the requirement of plant to complete the work package will often result in delays to other work packages. The `productivity factor' for this completed activity would be 1. 480 man-hours have been expended after 4 weeks with only 50% of the activity completed. if the productivity of one particular work package falls below the estimate. It should also be noted that the method of appraising work completed should be timely and consistent for each section of work. however. By monitoring. This often results in man-power being re-allocated to an activity which is falling below the estimated productivity factor. which results in the saying that 99% of tasks in 99% of projects are 99% complete for 99% of the time. Clearly. in a fixed-price construction project the foundation works of a particular unit has a programme duration of 4 weeks utilising 480 h and is completed in 3 weeks utilising only 320 h. activities or work packages are often reported as being completed when in fact they are not.

as illustrated in Table 10. these projects were undertaken on a costplus basis. To compensate for the time required to learn specific tasks. and completion can be verified and hence accurately reported on the basis of a completed item. 1. but productivity over the 9-month dura- Table 10. In most cases. Many of the US companies involved in the oil and gas industries in the Gulf of Mexico introduced EVA to major projects carried out in the Middle East.170 Engineering Project Management each activity are compared with the estimated target of man-hours and the completed items. a factor of.33 1. and then utilised to provide `productivity factors' relating to work carried out on projects in the US. The S-curve is then factored by 1. say. and this factor is called the US Gulf factor (USGF).96 . which is often performed by third country nationals (TCN). the overall `productivity factor' for this work package is 0.04 1.90 0. Data in the form of man-hours relating to specific tasks were analysed. To take account of the possible learning period for this activity.25 0. For example.96.80 0.3 Estimated/actual man-hours and productivity factors.55 0.2. The man-hours can then be scheduled for this work package against time.33 1.3.2 is used. Clearly. say. which permits adjustments to the overall target over the manufacturing period. productivity were weighted to take account of this additional time. If the total number of estimated man-hours is. In production-line industries man-hours expended can be collated on a daily basis through timesheets. then the factored total will be 240 000 h. Changes in the base rates per hour for each activity can easily be amended to identify the cost to completion.86 1.50 0. 200 000 h. the work package for the cold insulation of pipe-work may have a US base-rate of 1 man-hour to insulate 1 m of 200 mmdiameter pipe. Month 1 2 3 4 5 6 7 8 9 Estimated man-hours 10 000 40 000 60 000 50 000 40 000 20 000 10 000 9 000 1 000 240 000 Actual man-hours 18 000 50 000 70 000 48 000 30 000 15 000 8 000 10 000 2 000 251 000 Productivity factor 0.

which is normally the basis for reporting to the promoter. To ensure that the same mistakes did not occur again. contractors have superimposed individual S-curves to provide a total contract S-curve. This method of reporting and planning at timely intervals provides management with a clear view of progress and productivity. Over the remaining project duration. say. 17 work packages. when a project has an estimated man-hour expenditure of 11 000 000 h.Project Control Using Earned Value Techniques 171 tion has varied from 1. In one example. the productivity of 16 of the packages may be above that estimated. resulted in delays in processing invoices. When an audit of the work package was performed. then at some time during the activity the negative progress would have alerted management to the apparent problems.33. it was found that unless this critical work package was brought back on programme. since the total contract S-curve implies that the project is ahead of schedule. the allocation of man-hours and the inter-dependency on other work packages. This often results in a false picture of the project's progress. each work package was expressed in total histogram form with `productivity factors'. . In some cases a 3-month lag occurred between the receipt of materials and the processing of invoices. often with more than one cost code being applied to pre-assembled units. the promoter instructed the contractor to change the scales on each work package Scurve. Clearly. If effective reporting and updating had been carried out. An additional 30 000 man-hours had to be allotted to the work package. It is very important that work packages utilised in EVA are defined correctly in the disciplines to be adopted.33 to 0. the remaining 16 work packages could not be completed.5. The numerous cost codes. which resulted in an overall productivity factor of 0. The overall project is determined by the worst work package. In this particular example of a cost-plus project. In a project consisting of. time to complete and trend analysis being illustrated for presentation to the promoter. In a number of projects. the additional man-hours expended to meet the contract programme are paid for by the promoter. schedulers on one particular work package reported that productivity was as estimated. A further problem on this particular project was monitoring the receipt of materials delivered to the site. the accuracy of reporting actual work and progress is a prime function of EVA. and provides the basis for management decisions. a slight deviation on the graph does not fully represent the impact on the project as a whole. Clearly. but the man-hours recorded against the actual work completed were optimistic. This resulted in the project being reported as ahead of time and below budget.

A. where possible. Rugby. and Stallworthy. common understanding of terms. paperless systems. Wherever possible. 10. The project manager should agree on the reporting requirements as early as possible in the project's life. it is essential that the organisation uses and develops the system to suit their own needs. These requirements will be dependent upon size. Further reading Kharbanda. The accuracy of the estimated and actual data and the time intervals for auditing are paramount to its successful application. and need to cover: o o o o level of detail. E. (1991) Cost Control. It is sensible to format reports so that details can be summarised as necessary for upward transmission.P. data should be collected from existing systems. schedule.172 Engineering Project Management Project reporting The control reports should facilitate: o o o o o o agreement of customer requirements. level of reporting. and not to create mountains of irrelevant information. As with many reporting and scheduling systems. the accuracy of which depends on the time and costs prepared in the estimate compared with the actual time and costs as work progresses. standard formats. EVA is primarily a system of approximation. optimisation of data requirements. Institution of Chemical Engineers. minimal distribution lists. O.9 Summary Standard procedures need to be prepared as the EVA system is tested and the requirement of each discipline is addressed. complexity and customer requirements. recipients. .

Spon. 2nd edn. (1997) The Commercial Project Manager. McGraw Hill. Pitman. H. Financial Times. London. (1996) Project Management Demystified. Reiss. Turner. G. London. J. (1999) Project Management.R.Project Control Using Earned Value Techniques 173 Maylor. . London.

Therefore there is a need to obtain resources. work. The problem for the promoter of the project is that he cannot.Chapter 11 Contract Strategy and the Contractor Selection Process Contracts are used to procure people. and the equitable allocation of responsibilities and risk.1 Context Every project involves starting from one point and getting to a different point. equipment or services from other organisations in order to achieve the desired result. 11. In addition. In other words. The method by which the promoter will obtain those resources is that of the contract. This chapter is not meant to be a substitute for the expertise and thinking needed in drafting and administering any individual contract. materials and services. or does not wish to. This chapter outlines the main components in the selection process for both contract and contractor. the project objectives. it has to be recognised that different industries use different types of contract to achieve different results. A proper understanding of how contracts work and how they must be managed is therefore fundamental to the management of virtually all projects. It is an introduction to the relationship between legal means and engineering ends. and consequently are fundamental to project management. Indeed. materials. plant equipment. amongst other factors. The processes are influenced by the nature of the parties included. the project is always about achieving a result. there is an almost complete cultural divide between some industries. The standard type of activity/work-based contract used within the building and construction industries is totally different to the result-based contracts used within the equipment process or oil industries. provide all the resources necessary to get from the starting point to the final result from internal sources. most complex projects can be treated in several different 174 . In addition. and within service industries such as the telecommunications or the software industry.

contracts provide for payment in three different ways. They can be broken down into separate contracts on a time/stage basis. 11. the project objectives and the skills required to achieve them. At the opposite end of the scale is the reimbursable contract. Finally. with the preliminary design being carried out under one contract. a third being responsible for the supply of ancillary equipment. different contracts can operate in different ways. another being responsible for the supply of the main plant and equipment.Contract Strategy and the Contractor Selection Process 175 ways. Responsibilities may include design. equipment manufacture under a third contract. procurement. The type(s)/size(s) of contract should be selected by the promoter only after due consideration of the nature of the parties to the project. quality assurance and control. and a fourth being responsible for installation/erection. operating decisions. The promoter must decide. Finally. and so on. construc- . The different types of contract tend to create different relationships between promoter and contractor. scheduling. under which the contractor will provide the bulk of the work materials/ equipment or services for a stated price or fee. approvals. the way in which a contract operates will generally depend to a large extent upon the way in which it provides for payment by the promoter to the contractor. somewhere in between these two. in which payment is based upon the prices stated in a bill of quantities (BOQ) or a schedule of rates. is the quantities or rates-based contract. under which the contractor is reimbursed with the costs of carrying out the work plus a profit. In very broad general terms. a number of factors should be considered. They can be carried out under a single `turnkey' contract. and the appropriate allocation of duties.2 Factors affecting strategy In deciding the choice of contract strategy. The first is that of the price-based contract. They can be broken down into a large number of small contracts or a small number of large contracts. such as the typical civil engineering/building contract. with one specialist contractor being responsible for all civil engineering and site preparation work. safety studies. Clear definitions of the promoter's objectives are required so that the significance of these factors can be established. the contract management resources available. site preparation under a second contract. and therefore to produce totally different results. the time available to carry out the project. In practice. The responsibilities of the parties need to be determined. Each will give the promoter different advantages and disadvantages. responsibilities and risks. They can be broken down into separate contracts on the basis of contractor skills.

and it is the task of the project manager to advise the promoter which strategy to adopt. Many. mistakes and many more. The contract may need to be flexible. this would have obvious implications for the cost of the project. changes and innovations in contract arrangements have followed the privatization of what were formerly public services in the UK. Then the basis for payments for design.176 Engineering Project Management tion. site productivity. but it imposes maximum cost/price risk on the contractor. All factors are significant. but is not defined. time-scale might be the dominant objective in order to meet a weather window or to avoid disruption of the flow of crude petroleum. specifying performance. at the tender stage. The risks must then be allocated between the parties. These are all major influences on the choice of contract strategy. An important requirement is that the contract should provide for systematic and equitable methods of introducing management and pricing changes. who is to bear the risks of defining the project. For example. All these considerations are closely interrelated. This must be reflected by an incentive for the promoter to provide appropriate information and support in a timely manner. construction and services must be decided. the quality of plant and its ability to manufacture the correct product might be dominant. For example. design. testing and commissioning. There will often be a number of possible strategies which could satisfy these objectives. equipment. but it is likely that certain factors will dominate. It is also important to consider the provision of an adequate incentive for efficient performance from the contractor. selecting sub-contractors. or almost all. . If the work is on an off-shore oil energy project. This selection is possibly one of the most important decisions in any project. a lump-sum contract minimises the cost/price risk carried by the promoter. equipment installation. to try to meet commercial rather than political accountability. If working on a project for a plant to manufacture pharmaceuticals. in other words. inspection. and every project has to be assessed individually. The prime aim is to provide the promoter with sufficient flexibility to introduce change that can be anticipated. It is apparent that generally the interests of the promoter and the contractor tend to be opposed to each other. but they may also conflict. The converse is true at the other extreme of a cost-reimbursable plus percentage fee contract. of these factors could be important for any one project. There can be other criteria to consider.

Figure 11. Some are highly structured. Some relationships make for arm's-length dealings. Some are unstructured and will develop according to the way that circumstances dictate. the project manager should always remember the three `Rs' of contract management (Figure 11. Some relationships are permanent.1). A collaborative relationship requires a very different management style to an adversarial relationship.3 Contractual considerations First. Relationships form part of all commercial dealings. . Some relationships make for collaboration between the parties.1 The three Rs.Contract Strategy and the Contractor Selection Process 177 11. (1) Relationships. some are temporary. Different types of relationship need to be managed in different ways.

(3) Contracts are one area where the three Rs overlap each other. with no relationship to anything else during that time. Fail to comply with the rules and. however brilliant you are. The contract is an egg. The egg is its own little world. and carry out the terms of that contract. but who cannot manage risk properly. then the problem will be much more serious. as set out in the contract. However. Comply with the rules and you have a reasonable chance of being successful. Second. it is very important to understand that the law. This is obviously not the place to discuss the law of contract in any detail. the promoter needs to remember the constraints imposed by the law. However.) Every risk has to be managed by one or other of the parties involved. Once an egg has been laid there can be no direct contact between what is outside the eggshell and what is inside the eggshell until the egg hatches. then there is no going back. It is entirely up to the parties to decide whether or not they wish to enter into the contract. It is always important for the promoter to select a strategy that produces a risk set that he is able to manage competently. Risk does not go away. They have to live with the deal that they have made. takes a very artificial and simplistic view of the contract relationship. (It is also important to select a contractor who is also competent to manage that risk set. (1) Making a contract is like jumping off a cliff. Contracts formalise a set of risks. The written contract is seen as a complete and precise statement of all the provisions (2) . it is always there in one form or another. Rules. and something goes wrong. A contractor who can carry out work competently. If risk is not managed. Rules are created in order to regularise the way in which organisations and individuals work in relation to each other. it will bring with it its own particular set of risks for the promoter and the contractor. Whatever contract strategy the promoter chooses. Risks are present in all businesses and transactions. The law sees a contract in exactly the same way.178 Engineering Project Management (2) Risks. whatever the country. unless both parties agree not to do so. If one party gets itself into the `wrong' contract there is no easy option. is potentially disastrous. rules and relationships into one set of words which will govern all dealings between the parties while carrying out that contract. once they have made the decision and entered into the contract. you will probably fail to achieve success unless the other party is prepared to be forgiving. This view is best explained by using two similes.

Contract Strategy and the Contractor Selection Process 179 agreed between the parties relating to that contract. The use of the triangle is intended to illustrate the conflict between these three objectives. Everything has to be a compromise between conflicting objectives. then it will not be in the shortest time-scale. If the promoter wants the lowest possible cost. the time-scale will not be short and the cost will be high. These statements are really so obvious as to be virtual truisms. Figure 11. Nothing else can apply. If the shortest possible time-scale is wanted. and what goes on inside the contract is entirely divorced from any other relationships that the parties may have between them. time and quality.2). However.4 Contractor choice `Normal' contract objectives are usually said to be cost.2 Project objectives (adapted from Barnes and Wearne. 11. the promoter needs to consider carefully . In the planning of a contract. If it is the best quality. They are often pictured as a triangle (Figure 11. and nor of the highest quality. then similarly quality may suffer and cost will also have to be sacrificed. 1993). they do illustrate the basic problem of contract strategy.

and expertise of that contractor for the duration of the project. etc. Some of them are listed below. technical and organisational skills. To get the contractor to take some of the cost risks of a project. A promoter generally selects a contractor for one or more of the following reasons. The answers may be very complex indeed. unique design or manufacturing capability. scope. Whatever the reason. o o o o o o What does the organisation want to have? What does the organisation need to have? What can the organisation afford to spend on the project? How will the money spent on the project be recovered? What can the organisation provide from within its own internal resources? What does the organisation wish to provide from within its own resources? . To get work started quicker than would be possible by recruiting and training direct employees. for a clear reason. usually the risks of planning the economical use of people. such as licensed processes. This means deciding the answers to a number of questions. both physical and financial. That clear reason should then govern the promoter's decisions on the number. To use the skills of the contractor after the project has been completed. To encourage the development of potential contractors for the future. materials and sub-contractors. The questions are very simple. needed for the project. 11. type and terms of the contracts. To be free to use his own (limited) resources for other purposes.180 Engineering Project Management the reason for employing a contractor. materials in stock. To use the contractor to provide the resources. plant.5 Project objectives The most important decision that the promoter must make in relation to any project is to define precisely what the objectives of that project are to be. plant. o o o o o o o o o To use the particular management. the promoter should always make a positive decision. To deal with a contractor who is already known to the promoter. To have the benefit of the contractor's special resources.

rank them in importance. assistance by the contractor in operating or maintaining equipment. influencing or controlling design by the contractor. substitution of labour-based construction. Project management should bear all the objectives in mind. of one form or another. and seek a strategy to optimise their achievement. it is equally important that they are . Other objectives may also be important. the long-term operability of plant. and to define them in a way that allows a choice of contract strategy and contract type to be made.Contract Strategy and the Contractor Selection Process 181 What is the time-scale within which the project must be complete? What are the management resources that the organisation has available to manage the project? What type(s) of contract are those resources competent to place and manage? What type(s) of contract does the organisation usually use? Can the organisation define accurately what it wants/needs to have. ensuring high standards of environmental protection. the acquisition of know-how. establishment of an operating/maintenance force. promoter involvement in project and construction management. once those objectives have been defined. retention of construction plant by the promoter. ensuring high standards of quality assurance or plant/process validation. ensuring high standards of site safety. the ability to modify or expand the plant. or even dominant in some circumstances. The basic project objective will usually be to produce a usable asset. the performance of plant. such as: o o o o o o o o o o o o o o o o o o the management and control of risk. training of the promoter's staff. guaranteed supplies of spare parts for plant. Furthermore. It is always essential that the project manager ensures that the promoter clearly defines the project objectives. influencing or controlling the identity of any sub-contractors. or is producing that definition part of the project? o o o o o The answers to these questions will tend to define the project and its objectives. cooperation in construction and implementation.

182 Engineering Project Management properly understood by management within the promoting organisation. or arrangements to control and monitor the contractor's work. (The admeasurement procedure. The principal considerations are explained below. if `discipline' is to be imposed on the contractor. the more chargeable units of work or man-hours spent in carrying out the contract. construction. It requires a specification to be met. is a typical example of this. Anything less and the contractor risks not making a profit. which is common within civil engineering contracts.3 seeks to encapsulate the considerations that must underlie the choice of contract type that the promoter has to make. in theory at least. while at the other `quantities/rates-based' contracts and reimbursable contracts operate in a broadly similar fashion. Even if there is a specification to meet. It will need to be written into the contract or imposed by the promoter or project manager in such forms as a target± cost arrangement. Therefore. Indeed. and perhaps also a time-scale within which to do so. the higher the profit made. Discipline The price-based contract imposes `discipline' upon the contractor. it will not come from the basic contract structure. and are committed to those objectives. Therefore. there are no price constraints. The likelihood of a successful project is greatly improved when all the managers of the design. detailed contract reporting procedures. Therefore. A reimbursable contract may operate on the basis of `cost + profit' or `agreed rate' payments. user and support groups within the organisation are fully informed of the objectives of the project. Note that at one end of the scale there are the `price-based' contracts. the task of the project manager is straightforward: simply to observe the progress made by the contractor and administer the terms of the contract.) . 11. The quantities/rates-based and reimbursable contracts impose far less discipline on the contractor. the contract focuses the mind of the contractor upon the need to be efficient in carrying out the work.6 Contract selection Figure 11. and the need to provide a result that meets the specification included in the contract. and a price and (usually) a fixed timescale within which to comply. Any failure to comply is automatically penalised by the terms of the contract.

The promoter must choose.3 Contract types. .Contract Strategy and the Contractor Selection Process 183 Figure 11.

The second is only to supply the minimum amount of work or equipment necessary to comply with the contract. from the promoter's point of view. since the more work done. the greater the profit. it may not . down to the specification'. Therefore. or supply. the contractor usually bears a rather lower degree of price/money risk. The first. In one sense the inherent risk of the price-based contract is under-design/-supply (just as the inherent risk of the quantities/rates-based and reimbursable contracts is over-design/-supply. what a quantities/rates-based or reimbursable contract should do is to give the promoter proper project management powers to ensure that the contractor performs efficiently. The promoter knows exactly what the contractor will charge and when payment is needed ± and it is normal not to have to pay the full price until after the contractor has met the contract requirements. because this also saves cost. Change The great weakness of the price-based contract. Planning. for instance.184 Engineering Project Management Incentive The price-based contract gives the contractor two incentives.) A tightly planned contract will also always be vulnerable to severe disruption if work is affected by such problems as force majeure or change. is to plan and run the contract efficiently. because this reduces cost and increases profit. Under quantities/rates-based and reimbursable contracts. Risk The price-based contract automatically imposes a considerable degree of price/money risk on the contractor. is that as it sets up a rigid contract structure. to `design. however. the fixed/firm price contract must always be based upon an adequate specification. already referred to. give the contractor no incentive to under-design/-supply: it gives an incentive to over-design/-supply. and will usually impose a high level of other risk as well. The quantities/rates-based and reimbursable contracts on the other hand. on the other hand. creates a potential problem for the promoter in that a carefully planned and organised contract will never result in the shortest delivery period.) Therefore. An adequate specification is one that describes the result required from the contractor sufficiently accurately to minimise any opportunity for significant underdesign/-supply. (Minimising costs means avoiding the problems of overlapping activities. and a much higher level of this risk is borne by the promoter. Conversely the promoter carries a low level of financial risk.

the time-based contract will always be the best choice provided that the contract can incorporate an adequate specification and that the level of voluntary change is low. Change It has already been shown that the price-based contract copes badly with change. The promoter must also remember the implications of these different types of contract. the negotiations of the final contract document will almost certainly take more time. implementing change . This is a much more sophisticated relationship and requires a very different style of project management on both sides. and then put together the tender in response.Contract Strategy and the Contractor Selection Process 185 cope very well with anything more than the minimum degree of change during the life of the contract. including in particular a detailed and comprehensive specification. the relationship must always be at `arm's-length' even when it is highly cooperative. To place a pricebased contract requires the promoter to put together a detailed inquiry document. However. by their very nature. If cost is the main consideration. the relationship should be much more collaborative. the price-based contract is not always the best choice. project management time from the promoter. This takes time to prepare. Some of the more obvious implications that can be identified are listed below. bring in prices from potential subcontractors. the price-based contract requires a longer time-scale to put into place and to carry out than the other types. From the point of view of the contractor. finalise designs. etc. The net result is that price-based contracts do take a significant time at all stages. In particular. In the reimbursable contract. it requires more. and are therefore inherently more suitable where significant change can be foreseen. once that contract is in place it will probably require more than the absolute minimum length of time to carry out. This makes the tasks of the project manager and contractor much more demanding if a substantial degree of change does happen. Finally. however. Time-scale By its very nature. As has been shown already. Relationship In the fixed/firm price contract. Then the contractor will need time to examine that specification. and higher quality. cope much better. The quantities/rates-based and reimbursable contracts.. If time (or quality) is the main consideration. that change will still need to be managed.

The UK civil engineering and building industries have experienced the growth of a `claims culture'. For the equipment required for a new factory. Then that project might be let to a consortium of companies. for the promoter. and therefore too tempting. Often a consultant or design contractor may be employed to advise upon the feasibility stage of a proposed project. or a project management consultant to advise on risks and contract strategy. For implementation. Change is therefore much less adversarial. cost and organisational implications.7 Project organisation The number and sequence of contracts for equipment and services can vary greatly from project to project. In recent years. one contractor might be employed to install equipment supplied by others. depending upon the capabilities or preferences of the promoter (Figure 11. or be shared out among two or more separate contractors.186 Engineering Project Management part-way through the contract within the context of a tightly planned contract has considerable time.) It was to some extent instrumental in the production of the ECC conditions (see below). It is all too easy for the arm's-length relationship to become both adversarial and abrasive unless it is carefully managed. Many contracts have become the subject of adversarial claims for extra payments. This claims culture is directly contrary to theory. (Change within the quantities/rates-based contract should be no different to change within the reimbursable contract. . Or a project might be so large or so diverse that no one contractor is appropriate to share the risks. so that too many changes are made and the cost of the project becomes too high. A series of contractors can be employed in turn for construction work. Change is much easier to implement within the context of a reimbursable contract. 11. since the payment structure of the contract means that the cost/profit-recovery problem for the contractor is minimised. a particular problem has arisen with changes in quantities/rates-based contracts within the UK construction industry.4). which consume considerable resources on both sides before they are settled. Indeed the problem is that change can become too easy. it may be appropriate for a promoter to employ a single contractor for the whole project. This means that an arm's-length relationship between the two parties will always come under a certain amount of stress if the managers on both sides find themselves in a series of negotiations about the cost and time implications of changes imposed on the contract by the promoter.

.Contract Strategy and the Contractor Selection Process 187 Figure 11.4 Organisational structure.

design and supply) The simplest arrangement contractually is that a single main contractor is responsible for carrying out everything necessary for the project from the start to the hand-over of the completed work to the promoter. although this is often broken down into elements or phases of work. parts of the work may be sub-contracted to specialists. Alternatively a joint venture or consortium approach could be adopted. Although the main contractor is responsible for engineering. overall project organisation tends to be better. . obtaining public approvals. purchasing process materials or other functions. finishing and services work. another for new foundations. Package deal (`turnkey'. design integration is much easier. The common types of project organisation are described below. the resources and expertise the promoter is able to commit to the project. instead of one main contractor who would sub-let these specialist tasks. installing it. procurement. Payment is generally on a lump sum or reimbursable basis. The main contractor may also be responsible for ancillary activities such as financing. the balance between management. For a building project.188 Engineering Project Management for instance one for demolition work. each under different terms of contract. the time can be shortened as a result of design/construction overlap. the resources and services offered. the price/cost of the project will probably be reduced. the promoter has to deal with one organisation only for both design and construction. or testing and commissioning for replacing part of a factory. the superstructure and building work. The choice of an appropriate organisation for any project should consider: o o o o the ability to meet project objectives. The main strengths of the package deal contract are: o o o o o o pricing/costing the project at an early stage may be possible provided the promoter's requirements are known. completing systems and services. installation of equipment. different contractors could be employed separately for the structural. and testing and commissioning. design and implementation. and others for designing and supplying equipment. construction.

These contracts are described in more detail in Chapter 17. The ownership of the facility then returns to the government or private promoter organisation at the end of that concession period. o o o o However. It can also satisfy a need for an early start to a project. In such fields as civil engineering. warehouses or office blocks. These include: o o o o o o o the contractor may not always do what the promoter expected. The contractor. some in-house practices of the promoter might constrain the contractor. where contractors are widely experienced in this type of contract. managing the contractor will require high-quality skills. the design should be tailored to give the most efficient construction.Contract Strategy and the Contractor Selection Process 189 fewer promoter's resources need to be involved. When the promoter and any advisors have insufficient specialist management resources for the project. Concession contracts or build±own±operate±transfer The build±own±operate±transfer (BOOT) concept can be defined as a major start-up business. the promoter will have little contact with sub-contractors. own and operate a facility that would normally be undertaken by a government or a private promoter organisation for a fixed concession period. the package deal contract may be used when the building is of a standard or repetitive nature. operating requirements are better dealt with. for example houses. the promoter must commit to the whole package at an early stage. and the promoter's ability to control the contractor will be fairly low. which primarily relate to the role of the promoter in the project. or if the promoter wishes to place the work with a single organisation. the causes of defects are less a matter of dispute. the promoter is in a relatively weak position to negotiate change. undertakes to build. and it can also be used where contractors offer specialist design/construction expertise for particular types of project. In the process/plant and service industries. this form of contract is very effective. there are some weaknesses. or consortium of contractors. . the extent of competition is likely to be reduced. package deal contracts are widely used.

190 Engineering Project Management Separation of design and implementation The separation of design and implementation results in a series of two or more contracts for successive stages of the work for a project. Construction/ implementation is usually undertaken under a quantities/rates-based contract. which are arranged by the management contractor. the promoter is creating a contractual and organisational system which is significantly different from the conventional approach. Management contracts have considerable advantages in large civil . Often the design contractor will supervise the construction/ implementation contract on the promoter's behalf. A common example is the employment of an architect or consulting engineer for the design of a project. Some contracts will be consecutive. The management organisation itself does not normally execute any of the permanent works. Management responsibilities are divided. but it is possible to award two or more parallel simultaneous contracts. This is still the conventional or traditional contract arrangement for many building and civil engineering projects within the UK. These are packaged into a number of discrete contracts. Separate contracts for independent parts of the construction of a project divide a large amount of work amongst several contractors. and then a main contractor for its construction/ implementation. or occasionally under a lump-sum or reimbursable contract. and the promoter's involvement in the project tends to increase. offering reduced duration and risk sharing. but may provide specified common user and service facilities. will usually be lump-sum or quantities/rates-based. but the engineering contracts. Management contracting Management contracting is an arrangement whereby the promoter appoints an external organisation to manage and coordinate the design and construction phases of a project. Designers and contractors are employed in the normal way. The management contractor becomes a member of the promoter's team. Payment for the management contractor's staff is reimbursable plus a fee. When management contracting is used. The management contractor is appointed early in the project's life and has considerable design input. Examples in industrial construction and maintenance are separate contracts to employ the experience of different contractors' on different types of work. Another benefit is that the work can be divided into two or more parallel simultaneous contracts.

There are also some potential drawbacks with management contracting. but the design cannot be completed prior to construction (this situation requires good planning and control of the design/construction overlap and careful packaging of construction contracts. in particular to ensure proper coordination of the availability of design information with the sequence of work. It provides flexibility for the promoter's design changes during construction to improve the fitness of the project for his needs. Cost savings can also arise from better control of design changes. The main advantages are listed below. or budgetary or procurement policy. and the contractor's design changes to improve buildability. o o o o o Time saving. where the package deal contract cannot normally be used. By saving time. an early completion of the project. the impact of cost inflation can also be reduced. o o o The promoter may be exposed to greater risk from the contractors than in a conventional arrangement. and delays arising from a scarcity of particular trades. There is some risk in the absence of an overall tender price for the complete works at the start of the project. improved buildability. Further time saving can arise from the special experience of the management contractor. which is the normal skill of the management contractor). . Management contracts can be particularly advantageous when there is a need for: o o an early start to the project for political reasons.Contract Strategy and the Contractor Selection Process 191 engineering and building contracts. There is a tendency to produce additional administration and some duplication of supervision staff. is one of the main advantages of this form of contract. Discipline can be imposed on the promoter's decision-making procedures and on the management of design. resulting from the extensive overlapping of design and engineering. especially on multi-disciplinary projects. and keener prices owing to greater competition and better packaging of the work to suit the contractor's capabilities. improved planning of design and engineering into packages for phased tendering. for example overcoming shortages of critical materials.

commission contract (PIC). install.192 Engineering Project Management innovative and high-technology projects. or some projects constructed by an in-house maintenance or construction department. always provide for a high level of promoter involvement at all stages of the work. Project services and management services contracts have been developed to deal with very large and complex projects such as oilfield development. Direct labour Instead of employing an external organisation. even EPIC contracts. construct contract (EPC). which is known in the UK as `direct labour' or `direct works'. and it is useful when the promoter and advisors have insufficient specialist management resources for the project. These operate in a similar way to management contracts in building and civil engineering. in all but the smallest . The only substantial difference between offshore oil contracts and others is that oil industry contracts. which typically may arise from the need to manage and coordinate a considerable number of contractors and contractual interfaces. for example: o o very large numbers of staff are involved.e. In broad terms. design). which is not used. the industry has always used totally different terminology to other industries when classifying its contracts. commission contract (EPIC) and the procure. and `management of management' becomes crucial to the success of the project. but with some significant organisational differences. o o Offshore oil engineering The offshore oil industry employs the same range of contract types as those used in other industries. install. Contracts within the industry are usually defined in terms of acronyms based upon the work to be carried out by the contractor. the project services contractor is formally integrated into the promoter management structure. However. the engineer. the EPIC contract is equivalent to what other industries would describe as a turnkey contract. Thus we have the engineer (i. If this is the case. and possibly several design organisations. the procure and construct (to a design supplied by the promoter) contract (PC). when it is likely that design changes will occur throughout. a promoter may have equipment made or installed. procure. organisational complexity. procure. with the exception of the Concession contract.

. but of course any dispute between the two departments would be settled by a managerial decision within the organisation rather than by external legal or other dispute resolution procedures. Contractual principles and these notes should therefore be applied to them. The expertise and responsibilities involved in deciding whether to proceed with a project are totally different from those required when implementing that project. both the responsibilities and liability for risk. installation and construction work are usually the responsibility of different departments. in effect. Some of these uncertainties will remain whatever type of contract is adopted. be the equivalent of a contract that specifies the scope. and that system cannot properly be defined until after work on the contract has begun. then a high level of uncertainty will be implicit in the project. the order instructing work to be done to the design may. except small ones. for example because they are participating in financing the project. for instance.8 Risk allocation A prime function of the contract is to allocate. If. Separation of these responsibilities may also be required when other organisations are involved. To make their separate responsibilities clear. 11. the contract is to be for the design and supply of equipment that is to be part of a system. then consideration should be given to separating the two roles. between the parties. The identification of potential areas of risk/uncertainty and consideration of the appropriate way to manage them is a logical part of the development of organisational and contractual policies for any project. and the tender must include a contingency sum for them.Contract Strategy and the Contractor Selection Process 193 organisations the design decisions and the consequent manufacturing. standards and price of the work as if the departments were separate companies. As described in chapter 17. For all such projects. an internal contract may again be appropriate to define responsibilities and liabilities. This arrangement should have the advantage of clarifying the responsibilities for project costs due to design and those due to the consequent work. or if the initial prediction of the purpose of a project has to be varied during the work in order to meet changes in forecasts of the demand for the goods or services that are to be produced. These internal `contracts' may be very similar in outward form to commercial agreements between organisations. if the contractor both promotes and carries out a project. Some risks can be due to a promoter's inability or unwillingness to specify what is wanted at the start of the project. Risk may be defined as possible adverse consequences of uncertainty.

ask bidders to carry very high levels of risk. Like many other words used in contract management. In the process industry. at times.9 Terms of payment Price-based: Quantities/rates-based: Cost-based: `lump-sum'. words can be used to mean different things. for example. cost-reimbursable. `fixed' or `firm' prices are stated in the contract the contract contains a bill of quantities (BOQ) or schedule of rates. Contractors would then have to cover themselves by prices far in excess of the most probable direct and indirect costs they might incur. on the other hand. If so. 11. the term `lump sum' is used to mean . together with a fee for overheads and profit. What matters in each contract are the terms of payment in that contract. but the trend in industrialised countries since the early twentieth century has always been that a risk should be the responsibility of whichever party is best able to manage it to suit the objectives of the project. either on the basis of actual cost (plus a profit) or agreed unit rates (sometimes combined with a target cost mechanism). Again it is important to remember that different industries and organisations use the terminology in totally different ways. Lump sum A lump-sum payment is based on a single tendered price or fee for the whole of the work. because. The actual costs incurred by the contractor are reimbursed. Governments and other promoters in countries with less engineering expertise do. the time lost and all or some of their consequent costs may not be recoverable. The words `lump sum' are used in civil engineering to mean that the contractor is paid on completing a major stage of work or reaching a milestone. All parties to a project carry risk to some extent whatever the contracts between them.194 Engineering Project Management Promoters rarely invite tenders on the basis that an organisation is to be committed to complete the work regardless of risks. The basic division of risks between the parties is usually established in the conditions of contract specified by the promoters when inviting bids. for instance on handing over a section of a project. that work may be frustrated by forces beyond their control.

and this may lead to cost cutting. in a series of lump sums each paid upon his achieving a milestone.Contract Strategy and the Contractor Selection Process 195 that the amount to be paid is fixed. the promoter and advisers will have minimal involvement/influence upon the implementation of the project by the contractor. claims and. there is always the possibility that a contractor who has accepted too low a price may be faced with a loss-making situation. a high degree of certainty about the final price. a defined stage of progress. while a firm price will be subject to escalation. coupled with a negotiation of consequent price/time/specification changes. i. Others use the words in the opposite way. It should be noted that . It can be adopted if the promoter wishes to minimise the resources involved in contract administration. the promoter's management resources are freed for other projects. Although relatively inflexible. contracts will generally include a `variation clause'. Payment based upon achieving defined percentages of a contractor's programme of activities is also known as a `planned payment' scheme.e. which provides the promoter with the right to make changes within the scope of the works. easy contract administration provided there is little or no change. Lump-sum contracts provide an incentive for the contractor to perform welll when design is complete at tender and little or no change or risk is envisaged. The advantages to the promoter of using a price-based contract are: o o o o o a well-understood and widely used type of contract in the equipment plant process and offshore industries. but perhaps subject to change as a result of escalation. in extreme cases. The words `firm' and `fixed' can also be given different meanings. Payment to a contractor under a price-based contract will usually be in stages. The disadvantages are: o o o it is unsuitable when a high level of change is expected. Some industries use the word fixed to mean that the contract price is to be the final price because it will not be subject to escalation. The use of the word milestone usually means that payment is based upon progress in completing what the promoter wants. it facilitates competitive bidding by contractors. the collapse of the project. especially where considerable risk has been placed with them.

good competition at tender. In these contracts. to a quality defined in an accompanying specification. Quantities/unit rate (admeasurement) Admeasurement is based on `bills of quantities' (BOQs) or `schedules of rates'. some overlap of design with construction. say. some flexibility for design change. Quantities/unit-rate contracts provide a basis for paying the contractor in proportion to the amount of work completed. Within the UK.196 Engineering Project Management this type of contract is rarely used for main civil engineering contracts. or within a limit of. In some contracts. the predicted amounts are usually stated in a bill of quantities which lists each item of work to be done for the promoter under the contract. the total amount to be paid to the contractor is based on fixed rates. what is called the `schedule of rates' is very similar to a bill of quantities in form and purpose. +15% variation on these quantities. Items of work are specified with quantities. disruption and risk is low. and is derived from measuring quantities of completed work and valuing those quantities at whatever rates are finally agreed in the contract. for example the quantity of concrete required. and is virtually standard practice within the equipment industries. and also in proportion to the final amounts of the different types of work actually required by the promoter if this is different to the amount predicted at the time of agreeing the contract. and is typically used in civil engineering and building contracts. the rates are to be the basis of payment for any quantity of an item which is ordered at any time. When bidding. In other cases. the tender total gives a good indication of the final price where the likelihood of change. it is much more common in process plant contracts. Contractors then tender rates against each item. Payment is usually monthly. An equivalent in some industrial contracts is a `schedule of measured work'. but changes as the quantities change. contractors are asked to state rates per unit for all items on the basis of an estimate of possible total quantities in a defined period. The principal weaknesses of the quantities/rates-based contract are: . However. The principal strengths of the quantities/rates-based contract are: o o o o o a well-understood. widely used type of contract within the civil engineering and building industry.

and of materials. Agreed low-profit rates will often be used as the basis for reimbursement of the contractor's employee costs as well. the final price may not be determined until long after the works are complete. and the level of risk is low and quantifiable. since new items of work are difficult to price. It should be noted that admeasurement contracts are sometimes used on high-risk contracts or where considerable change and disruption are expected. Contractors working under this low-risk arrangement should not expect to be rewarded at the same rate of profit as under price-based contracts because the risk burden is less. limits to the involvement of the promoter in management. promoters should proceed with caution and note the deficiencies of the traditional bill of quantities approach in allowing for extensive change. which is quantity-based and adversarial. Sometimes the costs of satisfactory or acceptable work only are reimbursed. In these circumstances. It is used on many public sector civil engineering projects such as roads and bridges where little or no change to the programme is expected. or only some. Some items. plus usually a fixed sum or percentage for financing. in arrears. equipment and payments to sub-contractors. or from an imprest account. but the promoter's procedures and regulations prevent the use of a cost-based contract. The contractor's cost accounts are open to the promoter (open-book accounting). will be paid for at unit rates. especially when considerable change and disruption has occurred and major risks have materialised. of the costs of rejected work. Payments may be monthly in advance. Cost reimbursable Cost-reimbursable contracts are based on the payment of the actual cost plus a specified fee for overheads and profit.Contract Strategy and the Contractor Selection Process 197 difficult claims resolution. and none. the cost-reimbursable contract probably tends to produce the most sophisticated and collaborative . overheads and profit. but can accommodate changes in quantity. such as computer time or telecommunication costs. and particularly for disruption to the programme. The simplest form is that of a contract under which the promoter pays (`reimburses') all the contractor's actual costs for employees employed on the contract (`payroll plus payroll burden'). In project management terms. limits to flexibility. o o o o An admeasurement contract can be used with a separate organisational structure. It requires that the design is complete.

plus a high degree of collaboration between parties. and a range of other work where the scope. The disadvantages of cost-reimbursable contracts are: o o o little incentive for the contractor to perform efficiently (but see below). In one sense. in particular.e. The advantages of cost-reimbursable contracts are: o o o o o extreme flexibility. the promoter in effect employs a contractor as an extension of their own organisation. no estimate of final price at tender. when the work is of an emergency nature. and as the basis for `partnering' contracts. To control the cost of costreimbursable work. the promoter must provide cost accountants or cost engineers who must understand the nature of the contractor's business. Unless both promoter and contractor are highly professional in their approach. risk. and in evaluating proposed changes. There are a number of situations where the use of this type of contract can be justified. but so is the prospective profit. and good control of. they allow and require a high level of promoter involvement. administrative procedures may be unfamiliar to all parties. It is also used for `fast-track' contracts. Finally. they should be restricted to contracts containing major unquantifiable risk. a knowledge of actual costs is of benefit to the promoter in estimating and control. repair and maintenance work. where the detailed design/specification of the plant does not exist at the date of contract. cost-reimbursable contracts are weak contracts from the promoter's viewpoint. Cost-reimbursement is therefore the basis of payment in many `term contracts' to provide construction or other work when ordered by a promoter at any time within an agreed period (the `term'). the promoter's project team must direct the contractor's use of resources. fair payment for.198 Engineering Project Management relationship between promoter and contractor of these three types of contract. and to projects where no other form of contract is feasible. The contractor's risks are limited. i. Under all such contracts. it is also used in contracts for development. Within the processing and offshore industries it is widely used in large projects. timing or conditions of work are uncertain. they facilitate joint planning. or when .

5 show the effects of a 50/ 50 share incentive mechanism and a fixed fee on the payment by the promoter and on the financial incentive to the contract. to the extent that a definition of the target cost is impossible. which is less than the sum of £165 million which he would have paid if the actual cost had equalled the target cost.5 million. The contractor receives a lower total payment. but also agree a probable (or target) cost for the probable scope of work. the difference between the actual cost and the target cost is shared 50/50 between the promoter and the contractor. the motivational effect of the incentive mechanism on the contractor and second.7%. if the actual cost exceeds the target cost. Target cost Target cost contracts are a development of the reimbursable type of contract. Before reaching the stage of tender documents. the benefits to both parties of working together to keep the . and any other costs specified in the contract documents as not being allowable under actual cost and contractor's profit. The cushioning effect also applies to the contractor.5%). The following simple example and Figure 11. together with an incentive payment mechanism which deals with any difference between actual outturn and target cost. but since he has to bear 50% of the excess costs. for example when there are multi-contract interfaces. the promoter is partly cushioned by the incentive mechanism. The promoter and contractor enter into a reimbursable contract. The contractor's actual costs are monitored and reimbursed under the reimbursable contract. covers the contractor's overheads.Contract Strategy and the Contractor Selection Process 199 the work is innovative and productivities are unknown. and the fixed fee is £15 million. as a percentage of actual cost. Conversely. Cost-reimbursable contracts can be used if the work is of exceptional organisational complexity. Any difference between the final actual cost and the final target cost is then shared by the promoter and the contractor in accordance with the incentive mechanism. which is paid separately. the promoter is recommended to investigate the implications of several different incentive mechanisms. In a case where the actual cost equals £135 million. the target cost will subsequently be adjusted for major changes in the work and cost inflation. but his margin. for example work involving research and development. If the incentive is to be maintained. is increased from 10% to 16. A fee. his margin is much less attractive (4. the total payment by the promoter is £157. The target cost is £150 million. This illustration clearly demonstrates two powerful features of a target cost contract: first.

promoter involvement. actual cost under strict control and to bring it below the target cost whenever possible. the target cost mechanism remedies the principal weakness of a pure cost-reimbursable contract by imposing an incentive on the contractor to work efficiently.e. and joint planning aids the integration of design and construction. i. risk. both parties have a common interest in minimising the actual cost. . Thus.5 Contractor's fee relative to actual cost. the efficient use of resources and the satisfactory achievement of objectives. to ensure that resources are adequate and the methods of construction are agreed. i. identity of interest.e. fewer claims result and settlement is easier. the contract offers an active management role for the promoter or their agent. realism.e. with bids coupled with thorough assessment. a high level of flexibility for design changes. i. The advantages of this form of contract are: o o o o o fair payment for.200 Engineering Project Management Figure 11. and good control of. the facility to require full supporting information.

unfamiliar administrative procedures and a probable small increase in administration costs. By standard contract conditions. and in evaluating proposed changes. or wishes to use the contract for training of his own staff or for the development of a local skilled construction labour force. which is of benefit for estimates and control.10 Model or standard conditions of contract The great majority of projects will use contracts that are governed by `standard' or `model' sets of contract conditions. The role of the promoter is significant and a target contract can be used if the promoter wishes to be involved in the management of the project. Time-target contracts are popular for certain types of work and Figure 11. Some important points to consider include: o o promoter involvement is essential.6 shows a graphical representation of a combined time. when the work is technically or organisationally complex. it is easier and quicker for the contractor to tender. which are generally accepted as a fair or reasonable basis for contracts within a particular industry. and a different attitude must be taken from that adopted on price-based contracts. or as well as. In-house conditions have the advantage. or disadvantage. we mean industry-wide conditions.Contract Strategy and the Contractor Selection Process 201 knowledge of actual costs. Targets can be based on other project parameters instead of. cost. If both sides understand the conditions from the start. 11. The advantages of using standard and model conditions are obvious. By `model' conditions.and cost-target mechanism. It saves enormously on time and resources if the contract can be based on pre-existing contract conditions that are already known and understood by both sides. or when the work involves major unquantifiable risks. that they will always be biased to a greater or lesser extent in favour of the company that writes them. we mean `in-house' conditions. and easier for both sides . o There are some potential problems in using this type of contract which might make it unsuitable for certain projects. The use of this form of contract should be considered when there is an inadequate definition of the work at the time of tender owing to the emphasis on early completion or an expectation of a substantial variation in work content.

Every set is written by a committee. and that fair conditions generally produce a better contract relationship and probably a more equitable result. Model conditions have the added advantages that contract negotiation will be easier and less adversarial. Promoters and contractors need to understand how such conditions come to be written and how they operate. Their meaning is well established.202 Engineering Project Management Figure 11.6 Combined cost/time target. They have been used before in hundreds or thousands of contracts. it will be for a typical contract within the industry as a whole. it is given the task of writing a set of conditions that is suitable for a typical contract. In the case of standard conditions. model conditions generally have accepted and understood meanings. it may be for a typical contract within a particular company. They have been debated by lawyers and managers in dispute after dispute. to manage the contract. . In the case of model conditions. In addition. Standard conditions will generally be written by a committee drawn from within the organisation. Model conditions are written by committees that represent the various interests within the industry. No set of standard or model conditions exists in isolation. However the committee is made up.

On the other hand. They deal with the problems of managing a large complex site operation and of dealing with such issues as `bad ground' conditions. such as design. the building must be constructed to a good standard. such as a computer system. deal with contracts where almost all the work is carried out on the site. the promoter needs to understand the points listed below: o o o what the basic commercial/contract situation is which that set is principally designed to cover.Contract Strategy and the Contractor Selection Process 203 The conditions will then be written to describe the work that the parties will usually carry out in that kind of contract. for instance. often deal with completely different issues and problems. especially model conditions. contracts for the supply of electrical or mechanical equipment. etc. and the various necessary stages of that type of contract. etc. the commercial attitude (or. and half-a-dozen people can install the equipment in a few days. writing and testing software. Civil engineering contracts. In other words. Different types of commercial/contract situation require different conditions of contract because the work is different. we have to read through the conditions and ask ourselves `What kind of story are the conditions telling us?' how flexible the conditions are. but the design/ construction would then also need to be validated. almost. Do they favour the promoter or the contractor. The contractor will spend many months designing the system. the bias) of the conditions. The conditions will also allocate the various commercial. construction. and therefore how easily and how far they can be adapted to cover other commercial/contract situations. and provide appropriate solutions to the more predictable problems that may arise. A building contract might cover the erection of a building. deal with completely different problems. A process industry contract might cover the design and supply of a plant to manufacture pharmaceutical or food products. the risks are different. and even more important. Then everything is taken to the site. and it will be inspected to ensure that this is so. and if so how? Do they try to hold some sort of balance between the two? Do they treat the . and the plant will be subjected to a series of exhaustive operating and performance tests to prove that it can manufacture the correct products for the correct cost. The plant will be inspected to ensure that it is properly constructed. The consequence of this is that the different sets of conditions. and therefore to be able to manipulate and make the best use of them in practice. the problems are different. To understand any set of model conditions. manufacturing equipment. manufacture of equipment. technical and economic risks involved between the parties to the contract. site preparation.

and the precise meaning and interpretation of any clause in the new contract could potentially be the source of lengthy litigation. 11. accept their work and decide when to pay them. o Promoters can. and was intended for all types of engineering and construction.204 Engineering Project Management parties as having an equal degree of skill. Even then. there are drawbacks with this approach: primarily that the contract will not have been `tested at law'. This would allow consistent risk and incentive strategies to be applied across multi-disciplinary boundaries. Practice varies as to whether a main contractor is free to decide the terms of sub-contracts. or do they treat one party as having a lower degree of skill than the other? what the more important sections of the conditions actually say. originally published as the New Engineering Contract in 1993. Hence the section above can be interpreted at a number of levels. in any country and under any legal system. It also varies as to whether or when a promoter . From time to time there have been attempts to produce model conditions of contract to bridge the gaps between different industries. and then modify some clauses or add additional `special' clauses as necessary. with different parties filling the `promoter' and `contractor' roles. However. A common principle is that in a main contract a contractor is responsible to the promoter for the performance of his sub-contractors. how the conditions actually operate in practice. use in-house contracts or commission new contracts for a specific project. ECC was sponsored by the Institution of Civil Engineers. choose the sub-contractors. Sometimes this will be the only appropriate course to take.11 Sub-contracts The same contract strategy principles apply to decisions made by a main contractor to employ sub-contractors. simply because the project is so unusual that no existing conditions are appropriate. in other words. It is more likely that the promoter will select a set of conditions of contract that most closely matches the requirements of the project. however. if they wish. For example. under any contract strategy. The most recent attempt in the UK has been the Engineering and Construction Contract (ECC). in a sub-contract the contractor fills the promoter role and the sub-contractor fills the contractor role. but in a further supply contract the sub-contractor could fill the promoter role and the vendor fill the contractor role. the meaning of the modified or additional clauses may be open to question.

R. S. Proceedings of the 1st British Project Management Colloquium. and Wearne. Chapman Hall. Reference Barnes. the main contractors employ subcontractors and suppliers of equipment. eds (2000) Roles and responsibilities. (1987) Purchasing and Supply Management. Thomas Telford. 571±88. Thomas Telford. S. 5th edn. pp. J. N. 2nd edn. . Chap. 30.M.H. London.Contract Strategy and the Contractor Selection Process 205 may by-pass a main contractor and take over a sub-contract. Turner. Institution of Civil Engineers (1995) The New Engineering Contract. London. and Simister. Henley. (1994) Constructing the Team: Final Report of the Government/ Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry. 7th edn. (1993) The Future for Major Project Management. Gower. materials and services in parallel. London. P. Further reading Bailey. In: Gower Handbook of Project Management. In nearly all engineering and construction. Sir M. London.J.. Aldershot. HMSO. Latham. Institution of Civil Engineers (1999) Conditions of Contract.L.

1 Tendering procedures Several different procedures may be used for selecting vendors. Term: the bidder undertakes a known type of work. for a fixed period of time. usually to a minimum total value. Serial: the bidder undertakes to enter into a series of contracts. Possible strategies for the identification and selection of the most appropriate contractor(s) and the broad principles that apply to the selection process are considered and reviewed in this chapter. As design and planning proceeds. Continuity: tendering competitively on the basis that bidders are informed that the successful party may be awarded continuation contracts for similar projects based on the original tender. and approximate quantities of the major value items. 206 . together with appropriate procedures for placing and managing contracts with the contractors that it selects. the final tender is developed from cost and price data supplied with the initial tender. 12.Chapter 12 Contract Policy and Documents Any organisation that wishes to employ others to undertake work on its behalf must have a coherent policy for their selection. Negotiated: usually with a single organisation. suppliers. but without knowing the amount of the work. but there may be up to three. (1) (2) Competitive: open or select (a restricted number of bidders). tenderers and contractors. Two-stage: a bidder is selected competitively early in the design process. (3) (4) (5) (6) In all cases a pre-qualification procedure may be adopted. The tender documents contain an outline specification or design. A form of standing offer.

even if the promoter is able to provide them internally. qualification of contractors in product. enhancements and fluctuation of the required works. broadly defining why. Perhaps a contractor can supply items at lower cost/risk than the promoter. experience and reliability. etc. price/cost. The promoter will. the promoter's project/contract management resources and skills. Perhaps a contractor can provide staff. quality. contractors should be independent. and the promoter's aim should be to manage the contract. equipment. previous performance. provide some of these requirements from within their own resources. there may be very good commercial reasons why the promoter should obtain them from others. Contracting out should encourage the optimum utilisation of the promoter's own executive staff. circumstances under which negotiated. Procedures It is always important to remember the basic principles. Contract procedures are written for the purpose of outlining the objectives and . However. The objective of going out to contract is to obtain specific works. As a general rule. labour and expertise that cannot be made available from within the promoter's own resources.. services and goods required to support the promoter's general business. Perhaps the type. commercial aspects to be included in the contracts themselves.2 Contracting policy It is important that every promoter involved in contracting has a formalised contracting policy established by management. Matters which merit review for a consistent policy approach include: o o o o o o o qualification of contractors in qualities such as reputation. location. self-sufficient and `at arms length'. not the contractor. facilities and services which may be provided to contractors by the promoter. types of contracts to be preferred in given circumstances. rather than competitive.Contract Policy and Documents 207 12. of course. tenders may be appropriate and/or acceptable. and keep administrative overheads to a practical minimum. or cannot be made available in the quantity or time required. when and how work should be contracted out by the promoter. what. services or goods are inherent to the contractor's special skills and not to the promoter's.

Contractors should also be made aware of the promoter's policies with regard to conflicts of interest and the giving and receiving of gifts and so on. which should regularly be brought to the attention of all staff. and promoters may consider it appropriate to incorporate a suitable clause on the subject in their general conditions of contract.208 Engineering Project Management scope of contract policy and the manner in which it is to be applied. 12. potential as well as actual. Sometimes contracts will be placed for minor or major modifications to equipment. the best interests of the promoter and its staff are protected and safeguarded. Business ethics Management should establish a code of conduct. They are designed to ensure that: o o o o o the promoter's policies and procedures are clearly stated and applied. and `purchasing/procurement'. appropriate input from advisory and client functions is incorporated at each stage of the contracting process.3 Contract planning The promoter will usually differentiate between `projects'. and should cover: o o o the general policy to be adopted in relationships with contractors and their staff. plant or facilities. award and control of contracts are defined. the importance of confidentiality and security in all matters concerned with contracting activities. as well as to and from appointed contractors. who should be dealt with in an equitable and business-like manner. plant or facilities. the obligation to declare any conflicts of interest. or servicing/maintenance work for equipment. Every organisation constantly buys goods equipment and services as a normal part of its operations. Sometimes the promoter will simply buy materials for consumption. on a need-toknow basis. Sometimes the purchase . should they arise. information is passed in an orderly manner to all parts of the organisation. such as raw materials. fuel or office supplies. individual authorities and responsibilities for the preparation. Sometimes the promoter will buy spare parts or replacements.

selection of possible contractors. They all involve the use of a contractor to supply some thing or some service to the promoter. bearing in mind the amount of the promoter's resources that would need to be committed. particularly in the process/equipment industries. The types of contract chosen also affect the master plan because of the varying requirement for control and monitoring. attention will need to be given to the various implementation considerations. including those factors which will influence the type and number of contracts.Contract Policy and Documents 209 of major works or facilities will be required. That point will change from organisation to organisation. The contracting strategy must address the choice of the number and types of contract that will best contribute to the success of the project. and will often depend upon the personnel involved and upon the circumstances of the case. This book is concerned with the overall principles and the practices that should apply when a project is involved. However. During the initial phases of a project. discussions should take place. At some point the promoter will stop purchasing items of equipment or work. In particular. One of the basic con- . An overall schedule should be kept to monitor the critical dates in the preparation and letting of contracts over the whole project. However the practices will change. As discussions proceed. culminating in the preparation of a coherent contracting plan for the project. Often the most acceptable tender will be the lowest-priced tender. review and develop the different aspects of the project. and also the critical dates within the sequence of activities for letting each individual contract. Competitive tendering would be the normal method adopted for letting contracts. and begin to operate on a project basis. Obviously the same principles must apply to all of these activities. and the contractor should be treated on the same general basis. It will often be necessary to prepare a number of plans to cover the details of each contract to be let. and the contract should be awarded to the most acceptable tender provided other criteria of comparability and acceptability are met. that will not necessarily be the case where time-scale. under the direction of the project manager. the quality or performance of equipment may be more important than the price. whatever the supply. and method of operation. `user' departments should always be involved in drawing up the project plan. Number of contracts The first step in contracting planning is to decide the number of contracts into which a project will be divided. or where. between the various departments and disciplines concerned to formulate.

acceptable to the owner. More contracts mean more design risk and more interfaces for the promoter to manage. Occasionally. and are competent to manage that type of contract. pre-contract means to ensure that the contractor has fully understood the contract. and this may mean that capacity restrictions necessitate separate contracts rather than a single contract. Tender stages There are two stages at which the promoter and the project manager can control the selection of contractors: first. The contract size must be within the capacity of sufficient contractors to allow competitive tendering. and that his proposed resources are adequate (particularly in terms of construction plant and key personnel). only one contractor may be capable of undertaking certain types of work. during tender analysis/contract negotiation and placement up to contract award. (1) (2) Each contract must be of manageable size and consist of elements that the contractor can control. that his bid is realistic. Both evaluations are important. and second. The following principles should be used in determining the number of contracts. The time constraints of the work may require parallel activities. (3) In setting the number of contracts. and a greater degree of management involvement. but may increase the promoter's exposure to other risks. These can then be considered in a number of different combinations to decide the minimum number of manageable contracts. and competitive tendering would not be possible. Such commitment should be minimised. capable of undertaking the type of work and the value of the contract. it is useful to list the elements of work and the contract phases from conceptual design to test and commission. . Fewer contracts reduce this involvement.210 Engineering Project Management siderations must be the effect of the number of contracts on the promoter's management effort. but they have different objectives: o o pre-tender means to ensure that all contractors who bid are reputable. before the issue of tender documents.

The choice is whether to adopt a full pre-qualification procedure specific to each contract. A full pre-qualification procedure may include: o o o o o a press announcement requiring responses from interested firms. financial security. the project manager should recommend a bid list for the promoter's approval. banking institutions. as no standard procedure exists. It is the usual practice to pre-qualify about 1.5 times the number of contractors to be included at tender. details of similar work undertaken. the issue by the promoter of brief contract descriptions including value. the provision of information by the contractor. including an affirmation of willingness to tender. This should be a formal document that provides a full audit trail for the selection process. it should discuss the reasons for the inclusion or exclusion of each contractor considered. discussions with other promoters who have experience of the contractor. financial data on the number and value of current contracts. and confirm that all of those selected for the bid list are technically and financially capable of completing the works satisfactorily.4 Contractor pre-qualification As a general principle. The evaluation may be done qualitatively. This is often achieved by a combination of quantitative and qualitative methods. or whether to develop standing lists of suitably qualified contractors for various sizes of contract and types of work. the promoter should always operate a prequalification procedure for project contractors. but subjective judgements should be kept to the minimum wherever possible. by a short written assessment from a member of the project manager's staff to narrow down the number of suitable contractors. for example. discussions with contractor's key personnel. Pre-qualification is never a totally objective matter.Contract Policy and Documents 211 12. Specifically. . After the potential bidders have been interviewed and evaluated. duration and special requirements. turnover. or a direct approach to known acceptable firms. and the management structure to be provided with the names and experience of key personnel.

permitted proofs of economic. it can be sufficient for a contract to consist of a drawing and an exchange of letters. The materials can be specified on the drawing. Some organisations. The drawing can show the location and the amount of work. the debriefing of unsuccessful tenderers. price and other terms stated in a letter or in the order. equipment and certain categories of services above minimum defined values must be procured in accordance with procedures laid down by the Directives. since normally no drawing or series of drawings can contain enough information. For the supply of equipment. These procedures involve: o o o o o o o o o publication of pre-information on procurement intentions in the Official Journal of the EU. not to discriminate on the grounds of nationality against contractors or suppliers of goods and/or services from elsewhere in the Union. If the contract is the result of a series of written or verbal interchanges or negotiations between the parties. 12. stated criteria for rejection of unsuitable candidates.212 Engineering Project Management EU procurement directives All companies within the European Union are subject to obligations. These can be lengthy. are also bound by the EU Procurement Directives. or a simple `purchase order' issued by the promoter to the contractor and acknowledged by the contractor. the practice has evolved of setting out the terms of the contract in standard sets of documents. To avoid doubt on all but the smallest of projects. a specification describing the promoter's requirements in detail will generally be necessary.5 Contract documents For a small amount of work. non-discriminatory selection of tenderers. the final contract must state all that has been agreed and replace all previous communications so as to leave no doubt as to what the terms of the contract are. primarily national and local government and state-owned or privatised organisations. publication of award details. These Directives require that all procurement of works. notification of individual invitations to tender in the Official Journal. financial and technical standing. but will often be virtually identical for . and the completion date. publication of prescribed contract award criteria. prescribed award procedures. under the Treaty of Rome.

It will need to concentrate on identifying areas where tenders do not comply with the promoter's requirements. The issues between the parties are then clarified. The contract should be concise. but this might comprise a core of two or three people supported by specialists reviewing particular aspects of the different tenders. Risks should be identified and clearly allocated. If the contractor is to have design responsibility. with specialist support from other design specialisations. A civil engineering or building contract would also contain a separate schedule of rates. The basis of the contract is established by the tender documents. The tender documents must provide a common basis on which contractors can bid. Practice varies from industry to industry and organisation to organisation. and yet meets the specification in terms of scope. The set of documents traditionally used in UK engineering contracts covers: o o o o o agreement. the objective of the review is to find the tenderer who offers the lowest price and best programme. unambiguous and give a clear picture of the division of responsibilities and legal obligations between the parties. schedules. and settled by subsequent negotiation between the parties prior to the award of the contract. the lead designer or process specialist. The precise terms of the contract are then defined by the contract documents. general and special conditions of contract. Lump sum: with this type of contract. and a representative of the user department.6 Tender review For larger projects. 12. specification. The tender review criteria will depend upon the chosen contract strategy.Contract Policy and Documents 213 many contracts and so do not have to be prepared anew each time. drawings. A typical core team would include the project manager. operability and economic maintenance. a contractual/legal expert and a quality assurance (QA) specialist. a dedicated tender review team will be required by the promoter. quality. and against which their bids are assessed. or bill of quantities. Reimbursable cost: the objective with this type of contract is to find the . design capability will also be reviewed if this has not been dealt with at the pre-qualification stage.

12. but usually essential). selection of the best bid and recommendation to the promoter for contract award. design or other advantages offered by the different contractors. exceptions must be carefully noted. A systematic evaluation of the tenders would include an examination of: o o o o o o o compliance with the contractual terms and conditions (and any qualifications made by contractors). screening of bids for detailed analysis. Quantities/rates-based and other contracts: will fall somewhere between these two extremes in terms of the promoter's risks. for obvious reasons.214 Engineering Project Management tenderer who has appropriate design and management skills. Some organisations take a rigid stance and reject all tenders that fail to conform totally with the inquiry requirements. if errors are detected in multiplying rates by quantity). and hence consider all submissions. Exceptionally low bids are automatically rejected by some promoters as they . In that event it is usual to require tenderers to submit a `conforming' bid as well as variants to allow comparisons to be made. Bid conditioning is a term which is sometimes used to define a process of reviewing all tenders in order to be able to compare like with like. Others accept that tenderers may offer alternatives of genuine benefit to both parties. This second approach is normal within the equipment/process industries. pre-award meetings/negotiations (optional. although it is rather less common in the civil engineering and building industries. as well as a project execution capability that gives the promoter confidence that it will meet the project requirements.g. A misconceived tender based on an error or misunderstanding by the tenderer should be easy to identify during tender evaluation. technical correctness of tender. The tenderer must also understand the promoter's requirements and offer a collaborative management team who are able to work with the project manager.7 Tender evaluation The project manager will open the tenders from the various contractors on a given date and at a given time. Where direct comparison cannot be made. and the review team must make a judgement on which tender will provide the best value for money. correctness of bid prices (e.

although the titles of the departments and individuals concerned may differ between organisations. the level of project management required often makes the services of a management contractor extremely cost-effective. such as those implemented offshore. give reasons for rejection. The report should: o o o o o o o o explain the background. then it is necessary to ensure that the project will be completed for this price. an attempt must be made to discover the contractor's philosophy. For the sake of conformity. The project manager controls the preparation of the tender package. However. In either case the procedures to be followed are similar.8 Typical promoter procedure Sometimes the tender packages are prepared by an organisation employed by the promoter. time and other implications for the project. 12. summarise the recommendations. set out the cost. In the evaluation. In the case of large projects. Contract award recommendations It is essential that the review team should put together a formal recommendation for the award of the contract. identify the tender recommended. The pre-award meeting/negotiation is the ideal time to discover the motives of the contractor.Contract Policy and Documents 215 suggest that the contractor has made basic errors. or by a consultant engineer or management contractor who is responsible for the design. The main purpose of the contracts department is to check: . possibly as the head of a department with duties solely relating to the preparation of contracts. If the promoter is to accept a low price. in some circumstances a very low bid will be a strategy for `buying' the job for the contractor's own valid commercial reasons. describe any bid conditioning process. describe bid opening and the initial position. summarise reasons for recommendation. the procedures will be described as if a management contractor has been employed by the promoter to coordinate the project. or is desperate to obtain work at any price.

accounts and payment. construction. The contracts department will maintain a register of tender documents. contractors' questions. date of issue to the tendering contractors. planning and other approvals. A standard procedure should be adopted to report comments and amendments to the contracts department. allowing sufficient time to incorporate amendments within the tender package. . and answers. Draft formats of the individual subject contracts should be circulated to each department for review. description of requirements. quality assurance/quality control (QA/QC). licencing. and the date to which tenders remain open. planning and scheduling. These departments in turn should liaise with their counterparts in the promoter organisation. the contracts department will liaise and coordinate its work with the other departments with regard to matters such as: o o o o o o o o o o o o o engineering/design. costs and estimates. including information such as: o o o o o o reference numbers. date of return of tenders. that all the particular requirements of the owner are included and covered in the subject contracts. o o In particular. law and insurance. tendering contractors. The final draft of the tender package is then sent to the promoter for formal approval prior to the issue of tenders. performance. safety/environmental considerations. The individual tender packages are usually developed from proforma/standard documents developed as standards for the project by a selection of alternatives and/or amendments. materials/procurement.216 Engineering Project Management that no gaps or overlaps exist between the individual subject contracts. `buildability/operability'.

It will normally be made clear to tendering contractors that the tender submission should be based on the scope of works described in the contract documents. the . For an international contract. The conditions of contract are often based on an industrial standard or the promoter's standard. A `form of acknowledgement' is usually included with the letter so that replies from all tenderers are set out in a standard way. Where the promoter will not consider alternative tenders. and usually comprise: o o o tendering procedures. commercial requirements. and must be agreed with the promoter. Standard conditions are prepared for the whole project. In either case it is likely that modifications will have to be made to suit the unique requirements of each project. Invitation to tender This should be in the form of a letter to tenderers written on behalf of the promoter. this should be expressly stated in the instructions to tendering contractors. and requests the contractor to acknowledge receipt of the documents and their willingness to submit a tender. legal and other experts in several different countries may need to be consulted. information to be submitted with the tender.Contract Policy and Documents 217 The procedures and pro-forma documents used by the contracts department in preparing tender packages should be set out in a document (sometimes referred to as a works plan). Conditions of contract (articles of agreement) The conditions of contract can be prepared by the contracts/legal department in consultation with the project manager and insurance/ finance/shipping disciplines. and that any permissible alternative tenders are to be submitted with a conforming tender as set out in the original tender documents so that the promoter may compare the two. etc. The letter simply invites the contractor to submit a tender for the performance of certain work. Instructions to tendering contractors Instructions to tendering contractors inform the tenderers what is specifically required of them in their tender. The letter lists the tender documents attached.

Indexes of drawings and specifications Indexes of drawings and specifications are usually prepared by the engineering department. to monitor the performance of the works. The promoter and the contractor will usually be the parties to the contract. specification. Programme for the works For larger projects. The description should be kept brief and simple and should not repeat detail already covered by the drawings. It should contain all key dates for the particular contract. and the philosophies of the contracting procedures (see above). the programme is usually prepared by the planning and scheduling department liaising with the contracts department. The description should be drafted with the aim of creating a broad appreciation of the works. The overall dimensions of the project should be stated. Brief description of the works The brief description of the works explains the overall requirements and parameters of the works to be performed. unless another arrangement is required for reasons such as project finance. A project manager be may appointed by the promoter. This section may also be used to detail such things as the facilities that are required to be provided on site by the contractor. programme or any other work element of the contract package. intermediate key dates for particular elements of the work. start of the works. including: o o o o o award of contract. completion of the works. where such elements are required to interface with work outside the scope of the subject contract. However. They should be correctly numbered to identify . critical dates within the contract. it should define any work that is not covered elsewhere in the contract package. The interface with other contract packages should be described without reference to the actual work contained therein.218 Engineering Project Management structure of the contract package. The standard conditions can be modified as necessary for individual contract packages. via a separate contract of employment. and technical links between the elements of the contract package should be described.

Practical delivery periods should be stated against each item. Generally.Contract Policy and Documents 219 the latest numbers and revisions of drawings and specifications contained in the tender packages. Promoter-provided items Where items are to be supplied by the promoter. but not the contents. The format. two copies of each drawing and specification are included in the tender package for each bidding contractor. those listed in the index of specifications and drawings) should be given an identifying revision number. delivery periods. specific storage requirements. The specifications and drawings issued with tenders (i. Contract coordination procedures The contract coordination procedures describe the administrative requirements for the implementation of the contract. they must be listed. Drawings and specifications The drawings and specifications are prepared by the engineering or quality control and assurance departments. The terminology of the specifications must be consistent with that of the contract documents. This would normally be done by the engineering department in liaison with the contracts department. The following items are usually considered: o o o o o descriptions of the items provided. The contracts department should review all specifications before issue to ensure that the terminology is consistent. details of returnable packaging. explanation of any markings. The procedures . It should be noted that such periods become contractual commitments and should be strictly adhered to.e. The contracts department should check the individual parcels of drawings and specifications against the indexes in the tender documents. of the indexes should be prepared as a standard by the contracts department in consultation with the engineering department. The indexing system will then usually apply throughout the life of the project.

If they are included. Practice varies widely between different industries. but a typical form might be as shown in Table 12. Table 12.1. a check must be made for any duplications or contradictions with the specifications. Guideline procedures detailing the implementation of technical requirements can also be included.1 Preparation of a tender package. In compiling the coordination procedures. Form of tender The form for a tender is prepared by the contracts department.220 Engineering Project Management explain the day-to-day duties and responsibilities of the site management team and the contractor's site team. The procedures also detail the lines of communication. Section Invitation to tender Instructions to tendering contractors Conditions of contract Brief description of the works Programme for the works Index of specifications Specifications Index of drawings Drawings Items provided by owner Contract coordination procedures Draft schedules Form of tender Form of agreement (format) (format) (format) (format) X (format) X X X Pro-forma used as standard X X X X X X X X X X X Individual sections to be pepared . but this is generally inadvisable. the construction department will need to work closely with the various disciplines to obtain their requirements for the implementation of their specific responsibilities.

McGraw Hill. . Collation and issue of tender packages The final collation of the tender packages and the issue to the individual tendering contractors should be in accordance with the contracting schedule and is normally the responsibility of the contracts department. London.Contract Policy and Documents Review of the tender package 221 Following the assembly of the tender package. J.R. any comments should be incorporated where necessary. Turner. London. Reasons should be given by the contracts department for not incorporating any comment. Thomas Telford. Queries from tendering contractors All queries from the tendering contractors during the tender period should be answered by the contracts manager. Any other contact between the tendering contractors and the promoter or other members of the staff during this period is to be discouraged. Following the reviews. T. (1995) The Commercial Project Manager. At least two copies of the reviewed tender package should be sent to the promoter for review and comments. a copy is sent to the department managers of the management contractor for review and comments. (1992) Successful Contract Administration. Further reading Boyce.

Smaller organisations tend not to have extensive rules and regulations and are more flexible in their approach. The design of the project organisation has to serve two masters. and there is always interaction with the promoter's teams and external and internal specialists and suppliers. The more bureaucratic organisations tend to be less flexible.1 Organisations Engineering projects consume large amounts of resources. At the heart of all managerial activity is the creation of an organisation to execute the managerial objectives. and communication. that is. No project operates in isolation.Chapter 13 Project Organisation Design/ Structure Earlier in this book. It puts in place a structure that defines roles and hierarchies. It is therefore essential to adopt a systematic approach to managing these activities. more predictable and better suited to stable rather than dynamic conditions. Organisation is about creating a control and communication system that allows management to achieve its objectives. This chapter is concerned with the manner in which projects and interacting organisations are structured. This approach is adopted to achieve control and stability. 13. organic organisations respond faster and adapt more easily in changing and dynamic situations. coordination and control mechanisms. the evolution and development of projects was examined. 222 . Larger and older organisations tend towards bureaucracy. The project needs to develop an appropriate organisation to function within the project environment and with external parties in order to fulfil its objectives. they operate extensive systems of rules and regulations to manage the organisation. The more flexible. are often complex and vary in scale. and to establish how the people within it relate to each other. Interacting with either type of organisation will have an impact on how the project organisation is developed. one involves flexibility.

Hierarchy relates to the number of levels of authority and control. planning and procedures. This is commonly referred to as the hierarchy of the organisation. it is possible to orientate the project organisation accordingly. which suggests that the most appropriate form of organisation is contingent on the influences on the organisation. large or small. Bureaucracy was founded on the principles of having this sense of order. A balanced hierarchy and sensible role definition do not necessarily create a good organisation. The hierarchy in an organisation is a function of the senior manager's attitude to control. However. The manner in which these interactions take place will have an influence on what the project organisation can achieve. The classic approach to organisation design resulted in a pyramid-shaped hierarchy. More recent approaches to role definition tend to set more flexible parameters for the participants of the organisation.Project Organisation Design/Structure 223 speed and dynamism. and places more faith in the people in organisations. but often have to interact with permanent external and internal organisations. is influenced by its approach to the system of authority. The design of the organisation should also facilitate coordination and communication. Roles are defined to allow for more autonomy and scope for individual innovation. Modern attitudes to organisation design refer to the `contingency approach'. Project organisations are temporary in nature. The next element in organisation design is how the roles of the members of the organisation are defined. and where decisions are made. 13. The hierarchy is influenced by the senior management's attitude towards control. the other processes. By understanding the influences on the design of interacting and sponsoring organisations.2 Building blocks of organisations There is no universal system of organisation that suits all circumstances. this approach may stifle flexibility. A rigid system of role definition and responsibility creates a sense of stability in that there is a place for everyone and everyone knows their place. that is best illustrated in traditional organisation charts. This approach resembles the organic organisation form. Every organisation. the greater the number of levels in the organisation. The closer the control or supervision of subordinates. but also fulfil its own goals. The less rigid approach to role definition allows hierarchies to be broken down. This should allow it to interact with existing organisations. creativity and prompt decision making. An organisation that does .

The structure should allow the company to be responsive to changing markets and customer needs. In an organisation that has complex projects and products.e. but the most important influence on the organisation is how it relates externally. government and so on can ensure success or create failure. External orientation in organisation design cannot be built into the structure. Burns and Stalker (1986) in work on organisations. there should not be a situation were there is `paralysis by analysis'. and tight to ensure that the organisation's goals remain a key focus. communication should occur up and down hierarchies. regulators. Decision making should quick and decisive. good communication and coordination have to be designed into the organisation. and helping to improve our understanding of the interactions between projects and permanent organisations. This is a sound approach where projects and products are simple. i. The customers. . Peters and Waterman (1982) in their study of `excellent companies'. markets. How does the understanding of these building blocks of organisation design help in managing projects? They assist by creating a structure for project organisations. loose to empower staff to take decisions and be innovative. showed the impact of structure on success or failure in turbulent environments. as well as between units at a horizontal level. It is difficult to identify individual factors that make organisation design more responsive to external conditions. Most of the design dimensions we have considered relate to the internal perspective of the organisation. There is a move towards creating multidisciplinary teams and cross-functional groups that interact more freely and are not constrained by specialist boundaries. an organisation design to help facilitate coordination is essential. Traditionally. organisation design has tended to use the division of work as a means of creating structures. That is to say. The role of senior management in creating a responsive structure becomes paramount. and high levels of coordination are not required. This pre-planned approach is becoming more important as organisations become more temporary and use more external sources for achieving goals. shareholders. also highlighted the importance of external orientation for organisations. Role definitions should have loose and tight properties. The design of the organisation should also serve a coordinating function. The emphasis on the need for communication should be built into the early thinking in the organisation design. In these circumstances. Communication should be both vertical and horizontal. but it develops as a result of the need to respond to external circumstances. but there are certain characteristics that should be present.224 Engineering Project Management not coordinate its activities or communicate efficiently will face difficulties.

In its simplest form. there are a number of generic organisation designs that exist. groupings of specialists give rise to the functional structure (Figure 13. their strengths and weaknesses. Functional In engineering. units and departments. These organisation forms have been developed over time and are present in engineering organisations that operate today.3 Organisation types Although we have considered the dimensions of organisation design. jobs have become more specialised. Specialisation is an extension of the principles of division of work. group or department. 13. there is no right answer. The growth in specialisation and expertise has had an influence on the way organisations develop.1).1 Functional multi-disciplinary engineering firm. lean and easily understood by those who work in it. . We are concerned about the factors that underlie their creation. and how they might influence projects that interact with them. Probably the best advice on organisation design was given by Peters and Waterman (1982) when they suggested that structure should be simple. Expertise and information are contained within each specialist function. hence. Functional organisations arise out of the principle of division of work. sections. and specialists tend to group together and form teams.Project Organisation Design/Structure 225 Organisation design is contingent upon the influences on the firm. and in many other fields. build on specialist skills and dominate most organisations through specialists. Projects operating within a functional environment are reliant on the cooperation of specialist Bloggs engineering Marketing sales Electrical engineering Architecture Mechanical engineering Administration Power Control Fabric Interiors HVAC Transportation Accounts Personnel Lighting Pressure Figure 13.

Projects operating in a functional environment require project managers to concentrate on integrating activities and communication with specialist departments. the entire focus of activity is on the division. This form of structure is known as the divisional structure (Figure 13.2). Organisations of this type design their structure by focusing on the specialist nature of the work or project rather than on individual expertise.226 Engineering Project Management functions and communication with other departments. Decision making is based on ensuring functional performance. Different specialist departments often guard their own expertise. and also lack of understanding of other specialists. The aim of the divisional form is to replicate specialist characteristics. etc. customer. have their own specialist objectives and are not good at integrating with other experts. to improve communication. and decision making is based on divisional Mondo engineering Rail engineering Water engineering Highway engineering Administration IT Design Maintain Design Maintain Design Maintain Construction Construction Construction Figure 13. They may lack a common interest. and consequently communication and decision making suffer. Moreover. It is this separation of interests that pose problems to projects. and to identify with the end product. as all the components within the organisation are geared to meeting the division's goals. Projects are easier to facilitate within a division. . The division Some companies try to overcome the particular problems of functional organisations by creating organisational structures that have more focus and facilitate communication between specialists. and the potential to disrupt the project cycle is more likely. Divisional organisations are predominantly found in large companies. size. Individual specialist interests are promoted ahead of project goals. location. but to focus on a final product through its specialist type. Participants at every stage of the product process are brought together to overcome the specialist niche mentality.2 Divisional organisation form by type of project.

3) attempts to resolve this problem by imposing a temporary project structure across the permanent specialisms. production and cost control departments who are working on projects A. Projects developing in the divisional environment require project managers to be aware of divisional and corporate priorities and how they may impact on projects.Project Organisation Design/Structure 227 requirements. B and C Project C Figure 13. which usually involves a balancing act between permanent specialist functions and temporary project structures. since inter-division rivalry. by their very nature.3 Matrix organisation structure. are temporary and are difficult to integrate with permanent organisation design. Working in a matrix requires careful role definition and a clear authority framework in order to prevent conflict. poor communication and inefficient information exchange may exist. Projects fall under the control of project managers. This problem is further exacerbated in organisations that tend to manage largely by projects. . The matrix structure (Figure 13. Projects are vulnerable where they operate between the boundaries of divisions. resulting in the situation that specialists are responsible to two managers. The matrix The third predominant organisation form that has arisen developed out of the problems encountered with integrating projects into existing organisations. Projects. The idea is to move groups of specialists to different projects as they are needed. The personal skills of the project manager are important in balancing the requirements of the project with the specialist Chief Executive Design department Execution/ production Cost control department Project A Project B Members of design.

4) is made up of interconnected layers. The third layer does not exist as an organisational entity. where multiple project teams are engaged in new projects. etc. but is embedded in organisational culture. corporate vision. and are assigned exclusively to the project teams until projects are completed. technology. It Bloggs engineering Contractual agreement Superdesign architects Structural engineering Project contract management Prestige design Structural engineer Design architect Project management structure Control systems Communication systems Figure 13. The top layer is the project layer. The project team members are brought together from the different units operating in the business system. These problems become more prominent with planning and resourcing constraints within the firm. . but also to delve into different layers of detail and background material. The hypertext organisation A further development of the matrix organisation has resulted in the hypertext organisation.4 Collaborative contractual relationships. and it may have a conventional hierarchy. as it is geared towards accommodating projects. thereby creating a different context. The central layer is the main business systems layer in which routine operations are carried out. each text is stored in different layers or files. This organisational form views bureaucracy and project teams as complementary rather than mutually exclusive. The metaphor that is used for such a structure comes from hypertext. Under hypertext. Hypertext consists of multiple layers of text. This term was suggested by Nonaka and Tekeuchi (1995) in their book The Knowledge-Creating Company. The hypertext organisation (Figure 13. while conventional approaches consist of one layer of text. The matrix has been used successfully as a structure to manage internal projects.228 Engineering Project Management functions of the organisation. It is possible not only to read through text.

Networks There is a trend in engineering companies to concentrate on their core businesses or activities in which they have the greatest competency. to only one part of the structure at any one time. and external resource inputs are needed. creating a more open system approach. such as role definition and hierarchy. . or reports. and resources are concentrated to achieve this. How are externally sourced projects structured? The elements of designing an organisation. The key characteristic of the hypertext organisation is its ability to shift people in and out of context to one another.Project Organisation Design/Structure 229 is the layer that helps contextualise the other layers and provides the basis from which the organisation can learn and develop. either the project or the business system. Some projects cannot be sourced entirely from internal resources.5 Network organisation. A team member in a hypertext organisation belongs. The vision. The third layer also helps to focus the organisation externally. still remain an essential part of structuring an external project. Hierarchical positions and roles are defined by contracts. The project manager is at the centre of Figure 13. The hypertext form of organisation is driven by the deadlines set by projects.5) which places the project manager at the centre. culture. The structural form that emerges is a network (Figure 13. technology and learning layers ensure that what is developed in other layers is communicated around the organisation.

managers will in essence be managing federations of companies that are networks. monitor and control these relationships. rather than the role anchored by the organisation and a codified job description. in his book The Empty Raincoat ± Making Sense of the Future (1994). while the project is achieved through external specialists. The virtual organisation is difficult to characterise in terms of work patterns. has now emerged. with greater use of temporary flexible arrangements. Virtual organisations maximise the use of people and knowledge rather than investing in the costs of permanent organisations. The use of virtual organisations on engineering projects will increase as we use more specialists and experts on a shorter time. They are temporary organisations that produce results without having form in the sense of traditional organisations. The virtual organisation is taking network organisations a stage further. the virtual organisation. the tasks and shifting group membership are the primary definers of responsibility. Charles Handy. As the trend towards specialisation increases. The virtual organisation is an exchange network. This creates a working environment that is more fluid and flexible. and without permanence. Time. Virtual organisations The past decade has seen profound shifts in our understanding of organisations and what it takes to be a member of an organisation. space. organisation structure. This power will largely be derived from the nature of the contracts set up between the project sponsor and external specialists. task and role basis. People are moved in and out of the organisation as and when they are needed. New forms of working involve different combinations of contractual and locational variables. The role of the project manager is to plan. and . They are networks of people and activities brought together to fulfil particular tasks without the bounds of traditional organisational form. the project manager will become more and more involved in managing projects that arise from networks of companies coming together for a project. boundaries and physical form. A major redefinition of the open-ended employment contract has taken place.230 Engineering Project Management a nexus of contracts. The virtual organisation defines roles in terms of the task of the moment. These formal relationships allow the project manager to exercise authority within the project. A new form of decentralised organisation. suggests that as more collaborative forms of management come into use. The project is initiated through an external project champion. The contracts and spatial relationships between the organisation and its members have been redefined. The key to operating under this structural form is the power that is vested in the project manager.

the ability to control it is reduced. In order to facilitate and execute internal projects successfully. Resources for projects are drawn from existing departments. is dependent on the power and authority vested in the project. Conflicts with existing departments will hamper projects. systems and roles that accommodate projects within their boundaries. The ability to structure an internal project. A powerful internal project champion may help the project overcome conflicts with the existing hierarchy. Internal projects.Project Organisation Design/Structure 231 will continue to develop as an organisational form as we improve communication technology. it also means that the learning curve and the group dynamics of the project team take longer to .4 Internal and external projects Many lessons on how we structure our project organisations can be taken from understanding general organisation structure. The primary constraint on virtual organisations is that it does not conform to the traditional approaches to management. The project manager also has to ensure that the needs of the project sponsor are balanced with the external challenges a project faces. The project manager has to ensure that contracted roles and responsibilities are clearly defined. without interference from the rest of the organisation. markets and technology take on a more important role in influencing the success or failure of the project. economics. which operate within the boundaries of the organisation. Existing operational systems. A more important aspect of understanding structure is its interaction with projects. Issues such as politics. While this offers flexibility in the structure of the project. hierarchies and cultural influences are also drawn into the project. organisations have to create reporting relationships. divisions and business units. The project becomes more susceptible to a variety of external influences. 13. with a sound control system in place. The structure and culture of such a project team is determined by the project manager. as there may not be the overriding influence of one organisation. have to accommodate structural influences. External projects differ from internal projects in that they operate outside the boundaries of the organisation or have a significant external influence on them. All projects have to interact with organisation structure. When a project operates outside the boundaries of the parent organisation. External projects may also be characterised by numerous participants that are from outside the sponsoring organisation. societal values. Internal projects are characterised by their reliance on the existing structure of the organisation. competition.

There are supporters of both these views. The role of the leader is important in that the leader's style of management can set the tone and culture of the organisation and the way it performs. as there is a need for clarity of direction. The main task in structuring an external project is to ensure that the orientation of the project will respond to external influences. Establishing project teams within existing structural arrange- . Projects with an external orientation have to respond more quickly to changes in the environment. Organisations increasingly rely on specialists that come from all levels within the hierarchy. The traditional approach to leadership was to centralise decision making and exercise control through a pyramid-shaped hierarchy. and also whether the structure is suited to the task. 13. of achieving organisation and project goals. There are the two extremes of leadership style. More recent views with regard to control and leadership tend towards decentralised and participative decision making.5 The human side of structure Organisation structure in itself is not the end. the centralised approach and the decentralised approach. This is regarded as a top-down approach to management. A more participative environment is better suited to dealing with complex problems where more ideas and opinions are needed. Decentralised leadership transfers the responsibility of leading to the individuals or groups involved in the projects. the centralised approach works well. but the means.232 Engineering Project Management achieve. The role of the leader in setting the style of management and the manner in which the structure is operated is crucial. taking on the characteristics of an organic organisation. and it is their knowledge and expertise that influences decision making. The manner in which the team is structured should be flatter and more responsive. Resource conflicts and associated problems also exist on external projects. Project teams and empowerment Engineering firms have also made increasing use of dedicated project teams. People have to interact within these structures to achieve success. In clearly structured task environments. Leadership At the centre of the structural arrangements are leaders. but it is also important to consider which approach is suitable to the task in hand.

Equally important is the development of the project team. Projects are temporary. They influence hierarchy. joint ownership. such as strategic alliances. control and goal setting. Project teams need to develop a sense of unity. Prior to the project team becoming directly involved in the project. These forms of working have an influence on projects and on existing organisations. Role definitions. and hence project teams are temporary. They are the source through which the organisation and project goals are transformed into reality. This allows the project team to bond. Empowering a project team is about transferring responsibility and authority to the team.Project Organisation Design/Structure 233 ments is always fraught with problems. The greater the sense of project ownership. but they have to achieve their objectives without the luxury of a second chance or prolonged learning curves. etc. it is common that some form of team-building exercise takes place. Early management thinking operated with the view that one company conducted all the activity required to produce a product. Collaboration takes many forms. The key to empowerment is ensuring that those within the team feel a sense of ownership and control over the project. The transfer of the control of the project to the project team creates problems with the traditional structure. roles. At the heart of all collaborative relationships is partnership. and a clear relationship needs to be established between the project team and the rest of the organisation. joint ventures. but it cannot be good at everything. reporting relationships. This focus on core competencies has led to the situation where collaboration between firms is more common. partnerships. the more the individuals within the team are likely to work towards succeeding on the project. It is safe to assume that considerable thought would have gone into the use of a . 13. purpose and identity fairly quickly in order to become fully functional. The extent to which a project team is successful is not entirely about human interaction. power and authority need to be addressed. and these measures may also be backed up by locating the team together and using other symbols of a distinct project identity. The view today is that a firm should be good at what it does. but these have to be overcome in order for project teams to succeed. The people within a structure have a great deal of influence on the extent to which the organisation can succeed.6 Structure in collaborative relationships The manner in which projects are carried out has changed over time. it is also about the extent to which the team is empowered to undertake its task.

It is essential not to forget the role of the parent company as the initiator of the collaborative project. Communication protocols should be established to ensure that issues relating to the collaboration get to the relevant levels within the parent company's management structure. The leadership arrangement will ultimately be a compromise between the collaborating companies. Consideration will also have to be given to how integration is going to take place with the parent firms. the collaboration will be empowered to achieve the targets that have been set for it with minimal parent company interference. but also about the relationships. In collaborative ventures. A good relationship goes a long way to making the project successful. Another factor that has an influence on collaborative projects is who leads the venture and from which firm does this person come? The question of bias towards one partner or the other may arise as a result of the senior project manager's decision. The parent company is an important stakeholder in collaborative projects. the more powerful parent company is also likely to exercise undue influence. This is the start of the relationship. It is also possible to select an `unbiased' external manager to head the collaboration. 13. Is the collaboration going to take on a conventional structural form.7 Structure in the international context Improvements in transport.234 Engineering Project Management collaborative relationship and the selection of the right partner. but then there is the possibility that there will be no political support from parent organisations should the project start to fail. One of the first issues to consider is how the collaboration is structured and managed. while one with a more organic approach will be more flexible. Alliances. They have to be kept appraised of how the venture is progressing. and there are a number of pitfalls that may damage it. Successful partnerships are not just about the contracts. Further discussions on collaboration can be found in Chapters 15 and 16. the parent companies will attempt to influence the collaboration. Companies are faced with the prospect of . This is an idealistic situation. reality suggests that because resources are involved. A parent company that has a bureaucratic approach will expect the collaboration to conform to these ideals. Ideally. partnerships and joint ventures involve people from two or more groups of companies. communication and technology have made the market place more global. The control exercised by parent companies will also influence the structure of the collaboration. a network or a temporary project team? Each system will have merits and negative factors.

It is therefore necessary to consider how the structure and management of a project should be adapted to take account of the way these dimensions influence working practices in a particular country or culture. large versus small power distances. In individualist cultures people look after their own interests. who are expected to be assertive and competitive. strong versus weak uncertainty avoidance. Power distance represents the extent to which less powerful people in a culture accept and expect power to be distributed unequally. values. Operating a project that is in an environment that the company is not familiar with throws up new challenges. The word `culture' means the collective symbols. and prefer stricter rule-based situations. and the differences in culture may become apparent when international projects are undertaken. In masculine cultures. but they are a fairly good generic collective expression of their culture. How does culture influence the way in which we manage? Gert Hofstede's seminal book on work-related values (Hofstede. From a managerial perspective. the environment is less confrontational and relies on relationship building. Many international projects have run into trouble because of a lack of awareness of cultural variations. These combinations and their variants appear in every society. The world is a diverse place. while in feminine cultures. The most tried and tested organisations are often required to change the manner in which they work when faced with different cultures. while in collectivist cultures they remain unquestioningly loyal to larger groups. heroes and practices that are common to a particular society. Culture will have an influence on the effectiveness of the management approach and structure being adopted. and involve the need to collaborate with international partners.Project Organisation Design/Structure 235 undertaking projects that are away from their home country in order to remain competitive. Engineering projects in an international context require work to be carried out in other countries. They are less tolerant of deviance and prefer certainty. The overriding influence on organisations is the impact of a change in culture. the society is dominated by males. Uncertainty avoidance represents the extent to which people find difficulty in coping with unstructured and uncertain situations. masculinity versus femininity. He came up with four key dimensions of national culture which influence attitudes to work: o o o o individualism versus collectivism. 1994) gives us some indication of how different people view their work. the poten- . These concepts may not be common to all the people within the society. rituals.

an understanding of cultural diversity is essential for better management. the facilitator must be a good diplomat with a network of contacts. Tavistock. The facilitator becomes part of the structure. It is the role of this person to ensure the smooth integration of the project into the local situation. approval and other forms of permission have to be achieved at a local level. Engineering projects may transfer technology to other countries. This individual should also be a rich source of intelligence on local culture. 2nd edn. and Stalker. T. London. It is common practice in certain circumstances to have a local facilitator on projects. Careful thought should go into the integration of the facilitator into the structure and how this role is defined. the realisation that more projects will require collaborative relationships. but a great deal of what is achieved requires local input. The lessons from this approach that can be adopted for projects are: o o o o o o clear definitions of the roles of the participants in the project. Hofstede.236 Engineering Project Management tial impact of the local culture on an international project cannot be neglected. The expectation is that the facilitator will help with the necessary local requirements for the project. Software of the Mind: Intercultural Cooperation and its Importance for Survival. politics and working practices.8 Summary The management of organisations requires a systematic approach in order to create a sense of order and control. an external orientation in setting up the project management structure. (1994) Cultures and Organisations. people and the way they are led is the key to making a structure work.M. 13. Planning permits. London. C. on international projects. London. (1986) The Management of Innovation. Hutchinson. . HarperCollins. Ultimately. an established and clear relationship between the project and its sponsoring parent company. G. G. and usually works as a consultant to the project manager. References Burns.B. Handy. (1994) The Empty Raincoat ± Making Sense of the Future.

C. (1967) Theory of Leadership Effectiveness. and Waterman. (1982) In Search of Excellence: Lessons from America's Best-Run Companies. N. (1995) The Knowledge-Creating Company.J.B.M.Project Organisation Design/Structure 237 Nonoka. R. (1994) Networks and Organisations. Oxford University Press. Nohria. Hutchinson. Boston. and Takeuchi. Fielder.J. Penguin. . Oxford. London. Harvard Business School Press. F. T. R. Butterworth. Handy. Further reading Belbin. Maidenhead. H. Peters. (1995) Beyond Certainty ± the Changing Worlds of Organisations. and Eccles. Oxford. Harper & Row. London. New York. R. D. I. McGraw-Hill. (1993) Team Roles at Work. New York. London. (1997) Exploring Management Across the World. Hickson.

a statement of requirements. and thereafter discuss the techniques used to manage the design work on a project. The ranges within which cost. It is also at these stages. infrastructure work. facility. from concept through to detailed design. Design input to the project does not finish at the time when the implementation of the design solution starts. or a performance specification. and in some enlightened projects the designer may even have had an input to the business-case development that lead to the initiation of the project in the first place. design input is needed to guide the implementation people as unforeseen problems arise. Effectively and efficiently managing design is clearly of fundamental importance in the overall project management activity. 14. schedule and quality criteria for the project will fall are determined during the design stages. This chapter will first describe the aspects of creativity in design.Chapter 14 Design Management This chapter concentrates on the stages of design where the greatest use of design resources usually occurs. then move on to the activities within the design stages. Throughout the 238 . The very creation of the input document is likely to have been moulded significantly by designers. particularly concept. that the ability of the designer to determine the characteristics of the project which are deliverable is critical. but the input of the designer to the project does not begin on receipt of this document. The input to the design stages is usually a brief.1 Role of designs Designers occupy a tremendously important position in a project's lifecycle. process plant or other type of deliverable engineering project begins to be `made'. As the building. Designers will probably be called on during the commissioning stages to assist when the design solution is finally being put into operation. in whatever shape or size it arrives.

engineering design. and works on some other activity or problem. designers will be called on to create solutions to new requirements not originally envisaged by the project owner. such as historical solutions to the particular problem under consideration. some of which are well known to the creator. The ways in which creativity manifests itself in these different design processes are many and varied. the person being creative assesses a number of information inputs. graphic design. in the synthesis stage. and the one which is probably used most frequently is shown in Figure 14. the input information is being synthesised in the sub-conscious mind. when the person working on the problem consciously moves away from seeking a solution.1. At the assessment stage. 14. business strategy. such as science. and are generally not well understood. the preparation of food and drink. There are many areas of industry and commerce where design activities are carried out. and some less well known and more fragmentary in nature. These include such diverse areas as creating new clothes fashions. At this stage. Creativity within the context of design is difficult to isolate. The ways in which the solution fails to meet the . By the nature of the concept. This is known as the assess±synthesise±evaluate model. creativity is also fundamental in many other areas of work and life. industrial design and architecture. engineering and business. they have arrived at. At times a fully formulated solution `appears' in the mind of the creator. However. although this is often illusory. and compare it with the problem as they have defined it to themselves in the assessment stage of the process. This is usually followed by the `eureka' moment.2 Understanding design At the core of the ability to design is some element of creativity. when the thinker becomes aware of what seems to be a major breakthrough in finding the solution. such as new production facilities to cater for increased market demand. When the facility has reached the end of its economic life. There often follows a period of time. The person working on the problem is then able to evaluate the solution. This period is often frustrating. or part solution. as attempts are made to manipulate the better and less well known elements of information into a solution. It is often associated with the `arts' as a generic term to capture all things creative.Design Management 239 operational life of the facility. designers may well be called upon once again to advise and assist in the process of safely decommissioning and removing the facility. creativity is hard to define and hard to measure. lithography. A number of models have been developed to represent the creative process.

(1) Bottom-up. needs of the problem are then taken into the assessment stage of the next round of the process. and in some cases has even been reported to be years! There are also a number of different ways of thinking about the progress of the design process itself. These models of the design process suggest that the way design is approached can influence the degree of control that can be exerted over design and designing. . Two models of design are commonly used. as distinct from the creative aspects of the design. or days or months.1 The assess±synthesise±evaluate model of creativity. Either method may be used according to the context of each particular aspect of the design.240 Engineering Project Management Figure 14. top-down and meet-in-the-middle. and these three steps are repeated until an evaluation of the solution indicates that the problem has been solved. The top-down style conversely works back from a desired final behaviour to sub-behaviours which are linked to components and their structures. The meet-in-the-middle design process style combines both bottom-up and top-down processes. There is clearly then some element of unpredictability in the process of creation. The period of synthesis between assessment and eureka can be the wink of an eye. The bottom-up style combines basic structures and eventually produces a final output.

but are sufficiently well developed to be costed using a global estimating approach. The common processes modelled include determining functions and their structures. Feasibility.Design Management (2) 241 The person-level methods. and what (2) . and as described below. since less attention needs to be paid to ensuring that ad-hoc processes are in place to meet the needs and constraints of the project for which the design is being carried out. the amount of time that would be needed to deliver the solution. 14. Various options are generated which will provide the design necessary to solve the engineering problem. elaborating specifications. usually to enable the designers to plan their work better. and dividing design work into realisable modules. Some element of planning is often incorporated. The feasibility of the various solution options are considered with respect to a number of criteria. and then an attempt is made to make it work. the activities that happen at each stage are quite distinct. At a less abstract level design activity can be made more prescriptive. the capability of the implementation team to deliver the solution. (1) Concept. Although it should be noted that there are several different models of the design stages. typically including the cost to deliver the solution. With a depth-first strategy.3 What design has to do Design stages Design is carried out at various stages of the project's life-cycle and is usually the predominant activity at the front end. Working within these explicit processes should encourage more creativity. developing layouts.2. whether the solution is congruent with the technology strategies of the project's participants. The proposals are at a low level of detail. searching for solution principles. However. or a methodology is used in which designers know intuitively which design to select at each stage in the process. and processes are more and more frequently being captured in design process maps. optimising design forms. a hypothesised design is thought of first. these stages may generally be depicted as shown in Figure 14. Several ideas may be pursued simultaneously until there is convergence to a final solution.

A decision will be made to progress the outline design to the detailed design stage. that may or may not have been further extended during the feasibility stages. The concept design. This may include process design. The work packages are then integrated to provide the overall solution.2. Outline. or they may be much smaller in scale. As with design work for new installations or infrastructure. There are. These design projects can be huge undertakings. many more criteria that may be used to assess the design solutions proposed. system architecture. Individual components are designed.2 Typical design phases for an engineering project. (3) (4) environmental impact the solution will have. . general arrangement drawings. space planning. However. such as extension works on a private house. The major work packages are defined in terms of form. larger refurbishment design projects usually have a project manager assigned to the design group. The work packages that make up the overall solution are broken down still further to the greatest level of detail. Design is also carried out when facilities are extended or refurbished. function and delight. Detail. the stages of design are almost always followed as outlined in Figure 14. and then integrated to form the work package. of course. The outline design solution that has been approved is now designed in detail. Design does not only occur on projects to build new facilities and infrastructure. requiring only a few designers to complete the design task. etc.242 Engineering Project Management Figure 14. as when oil refineries have new process plant capability added to existing facilities. is now developed to the outline level of detail.

The process used to tie the PBS and WBS together (and ABS if used) is the creation of the organisational breakdown structure (OBS). the creative element of the designing process requires a period of synthesis that cannot always be `forced'. The amount of subconscious activity needed may be little or great. It has only been recognised as an important subject since the early 1970s. WBS and OBS are common to the project management method. 14. effective design management within the project management context is still not well understood. work breakdown structure (WBS). This can appear to make the time . As the models of creativity and design discussed in the previous section of this chapter illustrate.Design Management The product and work breakdown structures 243 The processes required to define the work that is required to be done by the designers working on the project will result in a: o o product breakdown structure (PBS). Some industries also generate an assembly breakdown structure (ABS) that shows how the products or components are assembled together to create the design solution. and this is unsurprising since creating the design needed for an engineering project is a project in its own right. the subconscious mind needs to work on the problem. The creative aspect of design work does not easily lend itself to being managed with the same mechanistic focus that can be applied to engineering projects when they move into the implementation stage. which identifies the products. or components. which identifies the work required to deliver the designs needed to produce those products or components. This describes the way that the members of the design team will be organised to carry out the work needed to produce the designs required for the products identified in the PBS. and what resources (human and machine) will be needed to undertake the work. The mechanisms of PBS. and postgraduate qualifications began to be offered in the 1980s. that together form the design solution.4 The role of design management Design management is a relatively new area of professional interest. Design groups frequently have project managers assigned to them in an attempt to ensure that the design work is delivered to the client according to schedule. In fact.

g. Since within engineering projects design can be considered to be a project in its own right. cost and quality is insufficient. The sector is then broken down again. through an approach involving control over the design process itself. It is about understanding the impact of the environment (in the widest sense) on the project. Project management is not only about managing time. since they feel this constrains their ability to design effectively. and the difficulty this brings in terms of an accurate estimate of the time needed to complete a design task. Since a fundamental aspect of design is the element of creativity. there are a number of design management models which have proved to be effective. Designers may be classified by the industrial sector in which they are working. hydraulics. aeronautical. Indeed. imaginary and real. and hence cost. However. there is an equally difficult. that for those attempting to manage the delivery of design can be difficult to deal with. airframe. from the effective control of the flows of design-related information between the various project participants. e. and so on. fly-by-wire. Part of the design project environment is the creative aspect of design work. chemical. naval architecture. Despite this. There is therefore a likelihood of designers in these disciplines acting in a `tribal' manner. to a more abstract view relating design to corporate strategy. this must be considered in the management regime. food. experience shows that this tribal behaviour. and all have their own professional institution to represent them and ensure that a universal standard is applied to the education of these design professionals.g. e. electrical. Design management is defined in many ways. if effectively managed. control or electronic. Thereafter. of design work an impossible task. However. and does not necessarily have a negative impact on the organisation of the design. cost and quality though.244 Engineering Project Management management. then it would seem that project management techniques ought to be applicable to design management. with specialisation in each. and hence using a truly holistic project management approach to design management automatically allows for the somewhat unpredictable nature of the design task. the designers will fall into one of several professional disciplines such as mechanical. In addition to the difficulties of lack of empathy between different design disciplines. or propulsion in the aeronautical sector. many designers resent the `imposition' of a mechanistic management regime. managing the classic project-management triple constraints of time. can lead to significant innovations in the design stages of projects. culturally influenced misperception between designers and those responsible for implementing . These culturally driven misunderstandings can lead to a lack of predictability.

The inherent difficulties created by the difference of perception between designers and those charged with building the artefact or facility that the project was initiated to provide is not necessarily overcome by physically integrating designers and makers. which may even be at the same geographical location. these differences in perception must be formed. in the workplace that they eventually move in to. and the design of their overlapping work processes. Projects with nearly identical design and implementation processes. That design delivery should be managed must. making identification between the designer and the manager difficult.Design Management 245 (in other words building or constructing) those designs. In engineering. This difference in mental attitudes between the two groups may be visualised as shown in Figure 14. as in most other fields of endeavour. the people charged with implementing the design solution have a different mental attitude to that of the designers. and this must be either by implementation people or by designers. be unquestionable. however. Since engineering designers and those who manufacture. The designer works in the area to the Figure 14. and it is likely that the seeds of the antagonism that exists between the architectural profession and the constructors who build their designs are planted during their separate training.3. at least in some part. produce and construct are in many cases educated together (and are unlikely to be firmly set on the course of designer or implementers at that time). . The best solution to the problem of the location of these two groups. is determined according to the circumstances of each project. will often have completely different organisational arrangements.3 The contraction of the action space during the life of the project. One of the important exceptions to this `co-educated' system is that of architects.

As the project moves into the implementation phases. statutory bodies. . the design manager. This position between design and implementation allows the manager of the design organisation to have a significant influence over the amount of design creativity within the confines of the project. the need for the project participants to understand the cultural differences between design and implementation is important and is not necessarily intuitive. the degree of freedom becomes increasingly smaller. and a list of such participants would include at least: o o o o o o o o o o o o the promoter and appropriate groups within the promoter organisation (such as their design department). through feasibility studies. the design team leaders. and seeking to influence the designer's environment within the project. The person managing design. local authorities. team leaders in the project team. creativity within the design organisation. the users/operators of the project deliverable(s). or at least supporting. which may or may not be part of the promoter organisation. design checking consultants. and many alternative solutions to be generated. the lead designers. to outline and then detailed design. The manager of these design processes must be able to work effectively at the interface between `artistic' designers and `craftsmen' implementation people. Therefore. the degree of freedom gets smaller as the final design solution becomes clear. As the project lifecycle moves from concept design. This applies particularly to those that have an input to the design phases of the project. sub-designers and appropriate team leaders within those groups. This role can be seen to some extent as one of nurturing. This allows multiple perspectives to be taken on a problem. Sensitivity to the designer's need for autonomy and the management's focus on design (and hence project) objectives is a prerequisite for a successful manager of design. design approvals consultants acting on behalf of the promoter.246 Engineering Project Management left of the diagram. must be able to understand the perceptions of both groups of the project's reality. One of the fundamental requirements for effective management of design is an efficient flow of information between the participants in the project. and the actions required by the implementation people correspondingly more prescribed. where there is a great deal of freedom. the project manager.

the briefer and the briefed must have a two-way dialogue (symmetric). scheduling diagrams (for example. Hence. video). and the levels of authority on what information is passed. Always consider that the information being transmitted is important in terms of content. The concept of gates in the project life-cycle is relatively new. and document control processes. such as reports. to whom the information should be passed within each channel. Rules for the use of these channels must also be put in place. and not simplex. There are also other types of information that are related to the monitoring and control aspects of the management of design.g. verbal. and forms a significant part of the communication strategy. These rules will cover such issues as the medium in which certain types of information should be transmitted (e. since feedback on the content of the information is vital. and that the correct person receives it. Gantt charts. This also means that the communication path (or channel) must be duplex. but also in two directions. how to lay out minutes of meetings). It is important that an explicit communication strategy is developed. paper. There are also many other considerations that are dependent on the circumstance of each project. 14. e-mail. For instance.Design Management 247 The length of the list indicates the prospective complexity of the paths (channels) along which information needs to flow. is managed using several different processes. standard formats within each medium that should be adopted (e. The information being discussed in this context is that which facilitates design activity. Delivering design information to those needing it. i. for designers to fully understand the brief they have been given requires that they question the brief in order to gain a proper understanding of the brief writer's true meaning.5 Managing the project triple constraints The management of time in the design phases is fundamental to the delivery of the design at the appropriate time to allow the project schedule to be adhered to. The important thing to remember is that communication must be managed. The control of these types of information is also important for the effective management of the design phases of the project.e. information can flow in both directions at once (as in a telephone line). dependency networks). not only in one direction (asymmetric). The first part of this chapter has described the inherent difficulties in managing time in the design process. and the necessary channels between the project participants are established. when they need it.g. and has .

They may be `hard' or `soft'. A gated design process means that at certain points in the design phases. The rules for passing through the gates must be established. Figure 14. A hard gate is where the design cannot progress to the next stage if the gate is not passed. Figure 14. and different projects. In a typical fuzzy gate process. It is also possible to have `fuzzy' gates. However. Soft gates are ones in which the design is allowed to progress to the next stage even if it has not been accepted as `compliant' (dependent on the gate's rules). will position the gates at different places in the process.4 How a gated design process may be set up. parts of the design may progress to the next stage (those that comply with the rules).4 shows where the gates are commonly positioned. . a commitment must be made by the person responsible for the design (the design team leader or the design manager) to make changes to the design to ensure that it becomes compliant before the next gate. the design must `pass through' a gate.5 describes the different types of gates. Figure 14. There are commonly two types of gates.248 Engineering Project Management in the main been learnt in engineering projects from the way in which new products are developed for the consumer market. whilst the non-complying parts must be reworked in the previous stage until they do comply. The design process may not move into the following stage until sufficient reworking has been done to allow the design to pass through the gate. which are essentially a combination of hard and soft gates. as must the points at which the gates are positioned in the design process. although different organisations.

5 Types of gates.Design Management 249 Figure 14. .

the iterative cycles can be moved through rapidly. Detailed . However. Creating a dependency network. calculations. Putting extra resources into the work at the outline stage allows the development of the chosen design solution to be carried out much more quickly. or groups of design tasks.6). There is one particular method of scheduling that can overcome this difficulty that involves a technique called Dependency Structure Matrix (DSM). Scheduling the creation of the deliverables can then be done from the dependency between the deliverables. It must be remembered. and the final outline design solution can be articulated in a much shorter time. However. there is still no commercially available software application that can carry out DSM. At this stage. Smaller design projects can be scheduled by creating a Gantt chart without first creating a separate dependency network. will the outline design actually fulfil the promise of the concept chosen at feasibility) is removed from the process much sooner. and then a Gantt chart from the network. The difficulty with this type of scheduling tool is that the iteration that is a fundamental aspect of the design process cannot be modelled. though. The idea of doing this is to concentrate the project resource at the point where it has the most effect in shortening the overall project time scale. Front-end loading refers to the practice of employing a significantly higher number of designers earlier in the design phases of the project than has normally been the case. is the most effective way of building a schedule. that at the concept stages highly experienced designers will be employed to identify as quickly as possible the most advantageous options for solving the design problem(s). and there is probably a scarcity of such design resources in any firm.e. and leads to continual adjustments of the schedule as the iterative cycles in the design work unfold. The amount of iteration required between design tasks. An aspect of planning in the design stages that is crucial when estimating the time and manpower requirements is the degree of frontend loading that will be employed. This is not a very satisfactory way of scheduling. The duration of each individual task in the network is decided after consultation with those with knowledge of the work to be carried out. reports. In broad terms. the phase at which the biggest influence can be brought to bear on reducing uncertainty later in the project is at the outline design stage. and other documents) from the product and work breakdown structures. This means that the uncertainty that surrounds this stage of design (i. must be `built-in' to the schedule in some way.250 Engineering Project Management The process for scheduling design work must be based on knowledge of the individual deliverables (drawings. feasibility and detail stages (Figure 14. specifications. the loading of extra resources is also done at the concept.

Design Management 14. 251 .6 The design resource profile for a project with front-end loading.

This cost can be estimated using the information contained in the schedule. The time required to complete a design task can be multiplied by the hourly rate for the appropriate skill level of design required. There may be unknown risks from the construction process. and there is great experience and knowledge in the design firm of working with that technology. but the predominant cost is the designer man-hours required to produce the deliverables. or in addition to. and hence the cost estimate. in the construction industry. meaning all the firms with a significant input to the design process. Risks to other elements of the project are often not identified as having a possible effect on the design process. the next stage is to consider the risks associated with the design tasks. These must be assessed. there is probably little risk in this area. There are overheads to consider. or the designers have little experience of working with this technology. power. The cost to deliver design work is almost entirely the cost of the time of the designers assigned to produce the design ± essentially the cost of the human input to the process. or added to the overall estimate once all the tasks have been costed. that of the actual ground conditions that will be found as opposed to the conditions predicted from the geophysical investigation.252 Engineering Project Management design can then be started with less risk that the outline design will have to be revisited (which often means that the design process has to be stopped while the implications of a technical risk in the outline design are reassessed). Once the estimate has been produced. These may include such issues as: How well known is the technology that is being designed? If the technology is mature. administrative support and management overheads. such as the cost of the facilities required to carry out the design (the design office itself. It is most helpful if the design organisation. and the likelihood of changes to the brief from the promoter. are involved in the overall project risk management process. if the technology is new. Once the cost estimate to carry out the design work has been completed. and accepted by the manage- . software packages). a brief). Design involvement in the risk management process can help to ensure that these risks are picked up and incorporated into the design schedule and cost estimate. producing the cost to complete that task. classically. However. and the appropriate contingency must be made in the schedule and cost estimate. Other risks may be associated with the lack of stability of the design brief (or user requirements if these were issued instead of. There are a large number of risks that could have an impact on the design schedule. Overheads can be added per task. design tools such as CAD. then the risk of overrunning the time allowed to produce the design deliverables is high.

Design Management


ment function of the design firm(s), it is turned into a budget. This is an allocation of money to the manager of design to pay for the design work. At this time, the firm becomes committed to the expenditure, and the manager of design now has to provide accurate cost information to the accounting function to allow effective control of the business to be carried out. Cost control on larger design projects may be done using earned value techniques, and this methodology is discussed in Chapter 10. Often, though, design cost control is based on simple, and not integrated, cost reporting against the scheduled progress of work. It is during the design phases of the project that much of the quality of the ultimate project is established or enabled. There are a number of definitions of quality, but most of them in some way or another address the need to meet the requirements of the promoter. Two clearly different quality processes must be encompassed in the design phases of a project. The first is to ensure high-quality design work, in and of itself. Doing so is not a straightforward process, but consists of a number of aspects. Accurately capturing the requirements of the promoter is fundamental. Putting in place a design process capable of developing an appropriate solution is essential. Ensuring that the solution developed satisfies the promoter's requirements is critical. Carrying out these activities effectively is dependent on approaching the tasks with a consistently good attitude towards achieving high-quality design. The second process is about enabling the construction, building or manufacturing (the implementation) of the design to be carried out to highquality standards. This entails designing within the process capability of the implementation phases of the project. Process capability is well established in manufacturing industries, where the production machinery's capability to make a component to the required accuracy must be considered in the design stage. This means, for instance, that designing a component to a machining tolerance which is not achievable (by the equipment used to make the component) is explicitly prevented by the design processes used. This concept of process capability is directly analogous to ensuring that the design for a structure is buildable in practice, as well as in theory. The most well-established and comprehensive quality system for the design phases of a project is known as quality function deployment (QFD), or the `house of quality'. QFD can be considered to be a system for designing. It monitors the transformation of the promoter's requirements into the design solution, to ensure that quality is inherent in the solution. To do this, QFD integrates the work of people in the project's participant organisations in the following areas:


Engineering Project Management briefing (to understand what the promoter's requirements are); engineering (to understand what technology is available); implementation (e.g. manufacturing, construction ± to understand the process capability); marketing (to understand the promoter's perceptions of the solution that satisfies the requirements); management (to understand how the processes to ensure quality can be put in place). The primary set of considerations for the QFD team are given below. (1) (2) (3) Who are the promoter, in the broadest terms; i.e. the users of the project deliverable, the owner, other stakeholders. What are the customer's requirements, which may or may not be explicitly stated in the design brief. How will these requirements be satisfied, including an evaluation at the highest level of abstraction, such as should the project actually build a road or a railway to meet the requirement to transport people from A to B?

o o o o o

The term `house of quality' comes from the shape of the matrix used to capture the information generated in the QFD process (Figure 14.7). The client's requirements are scored in order of their relative importance and ranked after a weighting criteria has been used. The `roof ' of the matrix contains the elements of the design solution that will satisfy the

Figure 14.7 The quality function deployment matrix.

Design Management


requirements of the client. The ability of these elements of the design solution to satisfy these requirements is then estimated using experience and judgement in the central core of the `house'. The final part of the QFD exercise is to evaluate the client's acceptance of the design solution in total, and at the elemental level of the matrix, with regard to their requirements. It is important to understand that the QFD will not generate a design solution, but it will allow the quality of that solution in meeting the promoter's requirements to be monitored with rigour and accuracy.

14.6 Design liability
A key consideration in the management of design is the issue of the legal liability of the designers for defects in the solutions they create. Failure of the design solution may have many repercussions and affect many people. The designer may be liable under many different areas of the law. These fall under the three main groups of contract law, tort and statute law. There is insufficient space in this chapter to make any attempt at a meaningful coverage of the issue of design liability, so only a few commonly found issues will be touched on. Designers providing a design solution to a promoter with whom they have a contract are required to comply with the terms of that contract: usually to provide a design within a certain time, to an agreed price. In addition, the contract will specify technical details of the designer's work, against which it will be possible to determine whether the design solution fulfils the contract between the promoter and the designer. Failure to meet the terms of the contract is known as a `breach of contract', and is pursued in the civil courts to enable the promoter to get recompense, usually in monetary terms, for the damage inflicted by the failure of the design. The case will hinge on the terms of the contract (unless overridden by statute law, for instance where health and safety have been compromised). The designer may also be held liable in tort, which is a non-contractual liability to third parties. When designers produce a design solution that is faulty they may, in legal terms, be negligent, but only if they did not take reasonable care when carrying out the work. The definition of negligence is that the designer must use `reasonable skill and care' in the execution of the work. Common law (under which most contract and negligence law falls) is based on judging the present case against the principles laid down in previous similar cases in which a `precedent' has been set by a judge's ruling. There are appropriate precedent cases in most sectors of industry


Engineering Project Management that relate to the negligence of designers. There are also two particular cases that relate to the term `reasonable skill and care' of a professional (which is what a designer is considered to be). The first is known as `Bolam's test', after a case in which the reasonable skill and care of a doctor, called Bolam, was tested in a negligence case. Bolam's test sets the precedent for the skill to be expected from an average person working in their field of professionalism. The second case is called `Roe v. The Ministry of Health' (1954). This case established that a professional cannot be liable for negligence if they are following the normal practice at the time, even if that practice can subsequently be shown to be flawed. This has importance for designers working on innovative design solutions which have not been tried before. In these situations, despite taking reasonable skill and care, a design fault may occur that can only come to light after failure of the design; it could not have been predicted in advance. In this situation, the designer is unlikely to be found negligent. It is usual for designers to have professional indemnity insurance in place, in case they are found to be have been negligent in the execution of their work for a promoter with whom they have a contractual relationship. However, this type of insurance is expensive and does not buy a great deal of financial protection. For this reason, contracts for the supply of design usually have strictly limited liability clauses, with the designer (the supplier) often accepting liability only up to the value of the contract. Another very important issue for designers is their responsibility for `product' defects. In the area of product liability, which is most commonly found in products for the consumer market, the law does not allow for the professional designer to exercise reasonable skill and care. Liability in this case is `strict'. This means that the designer is liable for any defect in the product that is there as a result of the design process. Professionalism, or the lack of it, is not an issue. If there is a defect in the design, the designer is liable. In reality, the designer's exposure to risk due to a design fault is often submerged beneath the other product liability issues of manufacturing, workmanship and materials liability. Health and safety law is also an important consideration for designers. There are general industry-wide requirements for designers to produce safe design solutions, particularly (but by no means limited to) where the general public are exposed to the dangers of inadequate design. Many industrial sectors also have specific legislation to protect workers and the public from design failure (an example of which is the Construction (Design and Management) Regulations 1994). The importance of assessing and then controlling the design liability issues by managers of design is clearly of great importance. The design manager must be aware of the safety, contractual and insurance

Design Management


implications of the design project to ensure that they are managed effectively.

14.7 Briefing
The brief is often considered to be the key document for a design project. Although most sectors of industry would recognise the term, some do not: software design houses are more used to working with a statement of requirements, although the basic concept of the document is similar. Stated simply, the brief is the method by which the promoter (external to, or within the same organisation as, the designer) tells the designer what it is that needs to be designed. This sounds pretty straightforward until one begins to articulate exactly what is wanted by the people commissioning the design. The briefing process can, in fact, be excruciatingly difficult. The main cause of the difficulty is the way in which a solution to a problem is arrived at. The iterative and uncertain processes involved in arriving at a design solution were discussed earlier in this chapter. It may be considered that the ideal place from which a designer ought to begin working from is a pure statement of the requirements of the promoter (the requirements of a promoter are a clear and concise statement of the problem which the design is to overcome, completely devoid of any suggestion of the solution). Unfortunately, things are not so simple. First, it is enormously difficult to state requirements without some reference to the possible solutions. The requirements-capture process has only become better understood in recent years, and reliable models for requirements capture are not always easy to find. Some are available, however, although they tend to be associated with specific industries such as automobiles or information systems. To carry out the process properly is often a costly and time-consuming exercise, as the information required to generate a complete picture of the requirements must come from many people (users, builders, suppliers, marketing, maintenance engineers, and other stakeholders). The time and money to do the work may not be available. Second, just as how to create `solutionless' requirements is becoming better understood, some authoritative design experts are cautioning against the creation of such information at all. It is frequently found that the briefing process is distorted when the initial design concepts are presented to the promoter, and the promoter says, `I don't want that!' The initial brief is then adjusted by the promoter (hopefully with input from the designer) to reflect what type of solutions are not acceptable to


Engineering Project Management the promoter. Sometimes this cycle can extend far beyond the original design period, costing the promoter much more money than originally envisaged to employ the designer, and create great tension (and probably reduced motivation) in the designer or design group. Third, to make the briefing process even more opaque, it is also being acknowledged that one of the cardinal rules of the briefing process can legitimately be broken. The rule of never changing any of the requirements is often considered to be inviolate, and fundamental to the existence of the brief. This is frequently being challenged in some sectors, particularly in new product development, where the market for a particular product can be as short as a few months. Changing, or relaxing, a requirement in a design brief in these situations can mean that a design solution is created that will get the product in the market earlier than competing products, and may mean the difference between the organisation surviving or failing. The simple fact is that briefing is less about a repeatable process, although this may be desirable in many design project situations, and more about the interactions between the brief writer, those responsible for determining the requirements upon which the brief is based, and the designer. Creating a brief from which the designer can work most effectively, and in which the promoter has the most confidence of an appropriate design solution resulting, is a joint exercise. Frequently, this does not happen. Many promoters believe that they alone are capable of creating the brief, even if they employ specialist design expertise to help them do so. The point is that the actual designer who is to provide the design solution should have a big input to the brief, because the way he or she works will have an impact on the types of solution that will be created, and this can then be reflected in the brief. Involvement in the brief writing will also enable the designer to understand far more completely what it is that the client is likely to accept as a solution. The three parties together are also much better equipped to challenge the requirements definition feeding the brief, and seek sensible changes in the requirements based on information they all bring to the process. This means that less iteration between the promoter and designer is likely, although the design process iterations will still be required as part of the natural evolution of the final solution to the problem. The design outputs stand a far better chance of being delivered within the time scales envisaged by the promoter and at the cost expected. One of the many check lists for creating a design brief is included here for reference. It was designed by the Department of Trade and Industry and published in 1989. It provides a useful basis from which to assess the needs of a brief in any industry.

Design Management


Value for money/lifetime operating costs Product uniqueness/superiority o Selling price o Performance o Reliability o Serviceability o Maintenance costs o Life expectancy o Versatility o Running costs o Ease of operations/user appeal o Ergonomics o User friendliness o Appearance o Legislative and community factors o Compliance with regulations and standards o Safety o Environmental impact o Factors important to the manufacturer o Time-scales of the development programme o Unit cost of production o Facility for future range expansion or product improvement o Balance between in-house manufacture and bought-in items o Other factors o Size and weight o Ease of transport and installation o Cost of the development programme o External consultancy requirements and need for the involvement of sub-contractors or suppliers o Production levels envisaged and organisational implications o Investment requirements ± for stock, work in progress and production capacity. (DTI, 1989)
o o

14.8 Interface control
A design solution very rarely has a single discrete product, or is comprised of a single component. Far more usually, the solution comprises a significant number of components, and most often there are a significant number of components arranged in a number of sub-systems. For instance, a software programme of any size at all will be made up of a


Engineering Project Management number of modules of code, that act together to create the program's functionality. A car engine is comprised of many sub-systems: the fuel supply, the oil supply, the cooling water, the electrical system, and so on. This property of almost any system is not limited to engineering. Sophisticated drugs similarly comprise a number of systems of interacting components, such as the material used to bind the `active' parts of the drug together, the complex series of components that form the active component, and often a special outer coating which itself is a complex formulation. In almost all situations where designers work they will be dealing with a design solution that comprises multiple sub-systems, each containing multiple components. The management of the interfaces between these sub-systems is often crucial to the effective creation of the solution. Some disciplines manage these interfaces better than others, and those that do it well and consistently are usually `system' orientated, e.g. electronics, information systems and aerospace. Other sectors such as heavy engineering and civil and structural engineering, are far less systems focused despite the self-evidence of the fact that they also create systems (a bridge is clearly a system of interacting sub-systems). Effectively managing the interfaces between the sub-systems creates significant advantages in the overall management of the design process. Setting, and subsequently `freezing', the interface requirements between sub-systems means that the designers of the sub-systems can then work on designing their part of the overall solution without further reference to those working on adjoining systems. Each sub-system design only needs to satisfy the interface constraints. If these are met by the subsystem, then the operation of the internal components in the sub-system is not relevant to other interfacing sub-systems (from which property the term `black box' arises). Hence, the need for information to flow constantly between designers working on separate systems is removed. The work of defining interfaces is not trivial. In a system-orientated design solution the `architecture' of the overall solution (the way in which the sub-systems `fit' together) is usually the responsibility of a senior, experienced engineer. The architecture determines the way in which the design solution is broken down into manageable sub-systems, and what, and at what level, the interface constraints are set. The degree to which the overall design is broken down, and the size of the subsystems, is fundamental to an effective system, and hence design, management. The crucial interface management issues are given below. (1) Deciding to what level the overall design should be broken down into sub-systems, and therefore determining the number and `positioning' of the interfaces.

This is not an easy or comfortable approach to design for either designers or manufacturing specialists. Deciding on the tolerances that the constraints should have. One of the biggest cost drivers in manufacturing is design that does not take account of the most cost-effective processes for making the components. This means that compromises will need to be made for individual interface constraints. In essence. whereas freezing too late will prevent the designers from making the technical (and quite likely commercial) decisions needed to deliver the sub-system on time. the design for the processes that will be used to make the components is optimised at the earliest stages. in electronics when the circuitry is assembled. It is clear that it is vital that manufacturing specialists have a significant input at the design stages. the overall design solution will probably perform poorly. if too loosely specified. A schedule of the interfaces showing freeze dates and required delivery dates for sub-system designs is a valuable management tool. The process of bringing in this expertise to design is called design for manufacturing (DFM). or producing. Therefore. and their constraints. the components is worth pursuing. The `making' stage of a project typically accounts for between 75% and 90% of the total cost of the final deliverable project. It will also be needed for configuration management ± broadly.3 indicates the fundamental difference in mental . Reference to Figure 14. If the constraints are too tightly specified.9 Design for manufacturing In most sectors of engineering. optimisation of the sub-system design can be reduced dramatically. most of the cost in the project's life-cycle is incurred in the implementation stages: in construction when concrete is cast into its form in the position where it will remain. since not enough is known about the system's properties. in mechanical and electrical engineering when the designed components are manufactured. Ensuring that the interfaces. 14. Freezing too soon will lead to sub-optimisation of the overall system. anything that reduces the cost of manufacturing. the process of ensuring that the system architecture is allowed to change in a strictly controlled manner.Design Management (2) 261 (3) (4) Ensuring that the setting of the interface constraints reflects the needs of the overall design solution. are `frozen' at an appropriate time in the design project's life-cycle.

DFM needs to be started at the earliest stages of design. consumer electronics. These differences in awareness between design and manufacturing are natural and to be expected. the assembly time is heavily influenced by the ease of assembly of the product that will be sold. Getting these groups of people to work together effectively is a key task of the design manager when the design for manufacturing is being done. ultimately. It also implies that DFM workshops and review meetings are built into the schedule. The first is to plan for it to happen. it is far from obvious to designers that the manufacturing process capability required to make their design solution may not exist. The second way to ensure that communication happens is to create some common understanding of the issues faced by the two groups. In such industries as aerospace. Consequently. A major part of the `making' cost for a design solution is the time needed to assemble the various components forming the overall product. It is up to the managers of design to manage the DFM process proactively for the greater good of the client and. It is important to recognise that for the greatest effect. the realisation that differing cultures exist within design and manufacturing. when concepts are being generated for the various solutions to the design problem. and the manufacture of white and brown goods. However.262 Engineering Project Management models between designer and implementer. and then ensuring that appropriate DFM processes are created in time to be used most effectively. There is little point in choosing a concept design to progress into detailed design work if the concept chosen cannot be supported by the existing capability of the organisation to make the components. DFM allows a logical debate to take place about trading-off the costs of new manufacturing capability against the attributes of the design that can create extra value in the final product. this lack of knowledge about manufacturing capability is also frequently found when the design will be made in-house. For instance. the specialists in assembly processes must be brought into the design process in the same way as the manufacturing experts are . power engineering. The primary obstacle that this difference creates is that of effective communication. the design organisation itself. This means identifying where in the life-cycle of the design project DFM will have the most effect (invariably early on). and acting on. At the lowest level. Equally. There are two key ways to improve communication between these two groups. particularly when an external promoter is doing the making. A related design management process is design for assembly (DFA). manufacturing specialists are rarely aware of the specific reasons why a particular feature of the design is necessary to create added value to the promoter. The success of DFM can be ensured by recognising.

G. Thomas Telford. Conversely. and ease of assembly. Communication between the two groups is facilitated in the same way as for DFM. or even impossible. low-cost manufacturing. It is quite possible that the design of a component that has been optimised for manufacturing is very difficult to assemble. (1997) How Designers Think. The Free Press. Further reading Allinson. (2001) Managing Projects for Success. New York. K. (1997) Essentials of Project and Systems Engineering Management. (1997) Managing the Design Factory. Wiley. It is incumbent on the design manager to ensure that the correct trade-offs are made between designing for maximum client value. Unsurprisingly. plan to communicate. Architectural Press. . R. Reference DTI (1989) Design to Win: A Chief Executive's Handbook. Architectural Press. (1997) Getting There by Design: An Architect's Guide to Design and Project Management. The management processes of DFA and DFM also interact with the design solution. H. the differences in culture between the designers and the assembly specialists is just as evident in the DFA process as for DFM. Department of Trade and Industry.Design Management 263 involved in DFM. to make using existing manufacturing process capability. Wiley. Oxford. Chichester. Hamilton. Lawson. Reinertsen. New York. UK. Cooper. (1995) The Design Agenda: A Guide to Successful Design Management. i. and create a situation where a common understanding can be reached. adding time (and therefore expense) to the processes that will deliver the final product. A. Eisner. London. D.e. a design optimised for assembly may be expensive. B.

is discussed. the implications of different types of promoter are explored. including highlighting the influences on the purchasing and supply functions. The chapter introduces the idea of a supply chain system comprising a project-focused demand chain generated by the promoter and the contractor. The notion of the `world-class' organisation is introduced. drawn on theory and research studies across a range of industries to explore the implications for the project manager. and the concept of the project value chain introduced. and looks at the concept of supply chain strategy. This chapter presents the terminology used in the field. and the implications for construction are drawn from this. The chapter also presents research work conducted on supply chain scenarios in the constructional steelwork sector as an example of the potential impact of the newer procurement routes such as prime contracting and the private 264 . The chapter goes on to explore research into supply chain management that builds on work related to the MoD's prime contracting initiative. 15. A recently introduced procurement route initiated by the Ministry of Defence (MoD).1 Background Supply chain management is a strategic function of the firm that integrates those external and internal activities required to manage the sourcing. acquisition and logistics of resources essential for the organisation to produce products or services that add value to its customers.Chapter 15 Supply Chain Management This chapter defines supply chain management. Within this idea. and acting as a multiple project-focused demand chain hub that has to develop a supply chain strategy to meet different needs. The chapter presents a model for supply chain management. There is considerable ambiguity about the terms and definitions and the scope of supply chain management. and termed prime contracting.

price. using competitive mechanisms for supplier choice. Incentives and staffing systems are being aligned to accommodate these changes. and decision making will focus on securing the right quality. who will compete on the basis of core competencies in supply chain management. The focus will also be on the individual transaction. 15. and delivery at the appropriate time. It suggests that a new role will emerge in the industry. especially the larger ones. relationships with suppliers will predominantly be of an adversarial nature and at arm's length. Hence. with an increased use of cross-functional teams and a delegation of responsibility to lower levels in the hierarchy. that of the strategic supply chain broker. with mangers changing from a directing to a facilitating role.Supply Chain Management 265 finance initiative (PFI). with a consequent influence on the way they are managed. The chapter concludes with a section that develops a framework for the supply chain system in construction. responsive and flexible to changes in the business environment. Organisations. however. `Price' will figure strongly when purchasing managers evaluate a supplier's performance. dealing only with purchasing and the placement of orders with suppliers. It also explores the possible restructuring within the sector that may occur due to the emergence of the broker role. Policies and procedures will have been established to deal with the enquiry and competitive bidding processes. This is also linked to a greater appreciation of the opportunities that can accrue from more cooperative ways of working between suppliers . have needed to become more adaptable. It operates within a known hierarchical organisational structure. where paperwork systems dominated task activities prior to the advent of computers. typical elements in the traditional model include a specialist department. quantity. communication is now horizontal as well as vertical.2 Perspectives on terminology The `traditional' model of purchasing and supply focuses on developing and retaining appropriate knowledge and skills in the purchasing area. Managers have changed the manner in which they approach the wider organisational context. Finally. In addition. including the purchasing function. supplier and location. The traditional model is one where purchasing acts as the interface between the firm and its suppliers under conditions of market-based competition and economic rationality. Organisational layers have been removed. a number of recent and significant trends have resulted in a need for organisations to become more effective and efficient. or section within a department. Due to competitive pressures. although some repeat purchasing may occur. order placing and contract management.

to multi-site. 15. and potentially opens up new roles. For the supply chain to work as an integrated system requires the management of both materials and information. Product strategies requiring different approaches to time. The impact of lead times and individual cycle times is also encompassed within the analysis. including associated impacts on the marketing function. and not the operational. geographically dispersed locations. resulting in cultural changes within firms. This means that firms now have to work out their role and position within a wider configuration of organisations. One implication of the supplier network is that the boundaries of different supply chains might overlap. manage and improve material and information flows from suppliers to customers and end-users. mutually interdependent organisations cooperatively working together to transform. often including the concept of a `supply pipeline'. cost. with a consequent impact on organisational structure. often located internationally. This has put the supply function clearly on the strategic. and `upstream' and `downstream' terminology has become infused into the language. flowchart mapping techniques are used to understand these `flows' within the chain or supply pipeline. . This can encompass singlelocation activities for fairly simple firms. The idea of the `chain' has been extended to include analogies with rivers. This different way of thinking about supply and purchasing has resulted in a series of new terms being adopted and used to describe the domain.266 Engineering Project Management and customers. and has an underlying implication of a sequence of interdependent activities that are internal and external to the firm as a legal entity. The consequence of this is that firms are more willing to consider working closely with suppliers and customers to create a more integrated production and supply process that goes beyond legally defined organisational boundaries. seeing it as a series of connected. agendas of firms. and particular suppliers might become nodes within a more complex web of patterns of suppliers. control. with `relationship marketing' coming to the fore. The supply chain concept has emerged.3 Supply chain strategy Product strategies provide the basis upon which a supply chain strategy is built. Typically. Further extensions to the concept have included viewing a supply chain in network terms. It also involves managing the upstream and downstream business relationships between customers and suppliers to deliver superior customer value at less cost to the supply chain as a whole.

i. the creation of sub-assemblies within an overall finished product. Equally.1. Design and technology strategies are concerned with decisions about which activities are carried out internally and which are carried out by external suppliers. enhance or retain internal capabilities. they will entail related decisions on which design and technology competencies are to be retained internally. The final producer thus assembles a series of sub-assemblies. Tier 1 suppliers are responsible for producing major sub-assemblies. Design strategy considerations could also include: o o o o the use of concurrent engineering principles. product simplification and standardisation. Tier 1 suppliers. Decisions on design and make will encompass those to be undertaken either within the firm or by suppliers. Finally. It is possible that Tier 2 suppliers will have components requiring the . or they may decide to break the final product down into major sub-assemblies and contract these out for manufacture. will source from their own suppliers ± Tier 2 suppliers. the scope of the activities undertaken within the firm versus those that are carried out by external firms. in its various guises. The structural features of the supply chain. The final `manufacturer' or `producer' has a choice. They can decide to purchase and assemble all components and items and then sell on the completed product. and move ± the logistics activities and store. supplier involvement in design teams. in turn. The infrastructure of the supply chain consists of those features which are concerned with controlling the operation of the physical system. as indicated in Figure 15. is an extension of the make-or-buy decision.Supply Chain Management 267 quality and product innovation place different requirements on the supply chain and its structure and infrastructure. involve the fundamental physical activities of make ± the production activity. the use of computer-aided design through the supply chain and the coordination of design processes and data when in use. Sub-contracting. creates a tiered structure to supply chains. and include planning and control systems. The extent of `Make' or `Buy' is one of the fundamental strategic questions that managers in a firm have to ask in supply chain management. as part of a sourcing strategy. and the extent to which supplier innovation would also be encouraged.e. Finalising the make versus buy decision defines that part of the supply chain that is within the firm's direct control. as opposed to that requiring the investment of resources to develop. Design strategies also include product and process design. human resource policies and communication strategies.

1997.3.1 Source: adapted from Saunders. p.268 Engineering Project Management Figure 15. 150. . Figure 5.

business and supporting manufacturing. This type of organisation has no internal transformation process. and materials are brought to a fixed location where the product is built. on so on. they are involved in extracting a product or material that exists in nature. suggests that there are five process types of manufacturing organisation: (1) (2) (3) (4) (5) project based. In addition. quoted in Saunders. workers. The on-site construction process is the equivalent of this type. purchasing and supply strategies. the product received by the customer is intangible. continuity and variety of products being manufactured. parts and sub-assemblies into finished or intermediate products for sale to external customers. Construction is clearly project-based.4 The nature of the organisation Saunders (1997) proposes four types of organisation described below. transform. fabricate or assemble materials. This typifies construction. shape. each will have a different impact on SCM requirements. Design teams in construction are part of this sector. it buys in from external suppliers and sells on to external customers. (1) Fixed position. i. convert. . batch. line. factory layout has an impact. Those that are in the tertiary sector and are wholesalers and retailers. Here. o o o o Those that are in the primary sector. Hill. This schema accounts for variations in volume. Saunders acknowledges that within a heterogeneous group of firms there are sub-types that have an impact on the corporate. The number of tiers within a supply chain creates its structure and shape. jobbing unit or one-off. continuous processing. machinery and equipment. 15. Saunders proposes four distinct approaches to factory layout. Those that are in the tertiary sector and are service providers. form.e. where all resources. Manufacturing organisations that process.Supply Chain Management 269 inputs of Tier 3 suppliers. Saunders has also explored SCM issues through the type of manufacturing organisation.

where materials proceed in a fixed sequence through a series of processes. achieving sustainable competitive advantage and promoting internal organisational learning. The effective use of information technology to provide accurate and (4) . The flexibility to provide rapid responses to customers and competitors.270 Engineering Project Management (2) Functional or process layout. i. A programme of continuous improvement will normally involve the elements described below. where separate work centres are established with self-sufficient workers and equipment to make specialised families of parts or products.e.5 World-class organisation in manufacturing Owing to global competitive pressures. the manufacturing sector has concerned itself with developing the `world class organisation'. one that has an international reputation for overall effectiveness and knows its core business well. o Corporate strategies that are designed to expand the organisation's knowledge assets. functions or processes. (3) (4) 15. which is the key to differentiating the firm from its competitors. normally through using flat organisational structures. o Empowerment of employees and an incentive-led innovation policy. have a high relative impact on the business and have a crucial impact on competitive advantage. (1) (2) (3) A clear customer focus. This class of organisation will encompass four critical elements. Line or flow processes. Cellular manufacturing or group technology. A programme of continuous improvement. o Benchmarking against competitors. Benchmarking priorities in the supply chain revolve around an assessment of which processes within the chain are strategically important. where the factory layout is divided into separate areas or workflow-areas specialising in one type of process. and using best practice as an extension of process benchmarking or strategic benchmarking in terms of the future direction of competitor firms. often dedicated to a particular product. in terms of either products. o The use of outsourcing where it adds value.

Figure 4. The contractor is responsible for the major elements of expenditure. Hence. and yet. when looking at a project from a value-for-money perspective for the pro- Influence on total construction costs (%) 65% 25% 10% Appraisal and project definition Design and contracts Construction and procurement 5% 10% Design team 85% Actual expenditure during each stage (%) Client and specialist consultants Contractors and suppliers Figure 15. usually some 85% of the project cost.2 shows that the promoter and the design team generate the major cost commitment for most projects. primarily through design team fees. but are only responsible for approximately 15% of the promoter's expenditure. Depending on the procurement route adopted (a project-focused demand chain issue).Supply Chain Management 271 reliable information. 1999. to create the ability to respond rapidly and differentiate the firm. . greater knowledge and hence an understanding of the market place.8. may be cut off from any direct influence on promoter and design-team thinking and their commitment of cost in the early stages of projects. and to provide a competitive advantage. depending on the procurement route adopted.2 A schematic diagram comparing the costs and expenditure during phases of a construction project. Source: Standing. Figure 15.

In terms of the capacity and capability to influence their demand chains.272 Engineering Project Management moter. with influences ranging from the impact of share holder values on projects to time-to-market considerations and ownership . purchased and made to order across numerous project-focused demand chains. Promoter influences One important consideration for supply chain management in engineering is the impact that the promoter (or customer) has on the process. the multi-project supply chain of the contractor has to handle not only this. They can be separated into public or private-sector promoters. their individual requirements and design-team influences. Private-sector promoters are much more homogeneous. business and/or social needs for a project. they will face considerable product diversity owing to different promoter types. In terms of the roles and responsibilities within the distinct chains. and the manner in which they approach and interface with the construction industry. Equally. Public-sector promoters are now driven by public accountability and best value. coupled with the impact of the choice of procurement route on roles and responsibilities. The promoter commences the process of procurement. for example multiple fixedposition `factory' locations that require all resources to be brought together for the assembly process at each location. Some contractors that have the advantage of size will be able to influence their own multi-project supply chains. brings a demand chain together through a project process. and requires a completed product ± a facility of some type ± to meet a need. certain procurement routes preclude the contractor's knowledge and expertise from being accessed for the benefit of the project. knowledgeable. A number of distinguishing characteristics can be applied to promoters. regular. volume-procuring promoters are in a position of considerable power when influencing their own project-focused chain. the external environment to which they have to respond. However. The main contractors are also service providers offering to manufacture end-products that are designed. driven by their own organisational configurations. where contractors act as manufacturers. The public/private divide puts different pressures on the project-specific demand chain. and from potentially adding value much earlier in the project process. but also a number of other critical influences. the primary function and nature of the organisation will also have an obvious impact. Each promoter has distinct requirements and value systems. Design-team firms are clearly tertiary-level service providers whose role can change depending on the procurement process chosen.

o o Knowledgeable. and can be characterised as two types. These promoters will generally have a structured approach to project delivery. who will use facilities as part of their on-going corporate strategic plan to meet a business or social need. including the manner in which they will have developed the project brief for the industry. Promoters also differ in their level of knowledge of the industry. processes and design. often encapsulated in some form of project delivery manual or set of procedures or guidelines. They will treat the supply chain and its members as `technicians' who must deliver a project or projects to meet their business or social needs. . if any. and the extent to which standardisation may exist from project to project in terms of parts. appreciation of the complexities of engineering. and will tend to be directed onto a traditional procurement path because of their initial point of contact with the industry. Knowledgeable promoters will generally be the volume procurers of services. and will be driven to approach the industry because their existing facilities are inadequate in some way.Supply Chain Management 273 considerations due to private limited company or family business status. who view facilities as a method of making profit. A fourth dimension to promoter characteristics is the economic demand placed on the industry in terms of volume (frequency and regularity). and be demanding of the supply chain. and will often approach the consultants first. They will employ either internal or external project managers to act on their behalf as their interface with the industry. and will normally have undertaken an intensive study of their project needs. o o o Large owner/occupiers. and they will tend to be innovative in the manner in which they approach procurement. will trade the asset to achieve this. Promoters or customers to engineering projects can also be classified by type. Developers. who will often react to change. Small owner/occupiers. or see it as an investment to generate profit and look for business opportunities and available sites to ensure a quantifiable return. These promoters will often have limited or minimal in-house expertise and knowledge of the operations of the industry. They will rely on the design team to brief the project. depending on the type of project. This type of promoter will have limited. Less knowledgeable.

this type will involve a diverse range of needs in terms of technical requirements. o o o . n the use of the learning organisation philosophy. quality circles. where the promoters have large and ongoing spends across a range of project types.274 Engineering Project Management Unique projects have a distinctiveness of technical content or level of innovation. However. n the use of strategic alliances. and typical SCM tools and techniques suggested by Croner (1999) include: n clustering of suppliers. benchmarking and continuous improvement. n agile and flexible supply agreements normally using some type of `framework agreement' or `call-off ' contract arrangements using schedules of rates and partnering philosophies. exercised through specifications and forms of contract and quality assurance processes. joint ventures and partnering with suppliers using non-contractual forms of agreement. degree of uniqueness. and supplier innovation. components and processes. n control over product delivery. n a reliance on good professional advice. for efficiencies of process or standardisation and repetition. BAA and London Underground. and lean supply systems. Process projects can occur where the promoter has repeat demands for a project. SCM tools and techniques suggested by Croner (1999) include: n the use of competitive tendering coupled with strong prequalification and post-tender negotiation processes. Portfolio projects. just-in-time and inventory management. n rationalisation and consolidation of suppliers by spend. Typical. There are many similarities to manufacturing sector assembly lines. With this type of project there is limited. and a high degree of standardisation is possible through the volume placed into the industry. n the use of forward planning and demand techniques. or customisation and content. are an example of this type of project. Clients involved in this type of project might be the Defence Estates Organisation of the MoD. but regular spends will permit the development of long-term relationships with some suppliers. n the use of performance management and continuous improvement. total quality management. MacDonald's. unlike the process approach. Efficiencies can occur from standardisation of design. Typical SCM tools and techniques proposed by Croner (1999) include: n the use of forward planning and demand forecasting techniques. the fast food restaurant promoter. or are leading-edge projects that push the barriers of the industry's skills and knowledge to the limit. if any scope.

The next section looks at the impact of the procurement system on the project value chain. The problem then becomes one of ensuring the alignment of the different organisational value chains involved in the project process to form a holistic value-driven projectfocused demand chain working for the benefit of the promoter.1. The next section explores the concept of the project value chain. For example. indicating the levels of complexity that can creep into the project value chain as a supply network. The promoter value chain is concerned with a project to be constructed to meet a business objective. a more generic arrangement is set out in Figure 15. depending on the type of promoter.4) is subdivided into three distinct value systems: o o o the promoter value system that creates the demand chain. 15.5. There are two primary transition points in the project value chain. involving parts of the demand chain and the main contractor's supply chain. The decisionto-build stage is the point at which the promoter effectively out-sources the `business project' to the construction industry in the form of a `technical project' to meet that need. the user value system. The project value chain forms part of an organisation's value chain. since project activities are superimposed on the organisation's normal operating activities. This leads to the concept that a project adds value to the organisation through its own processes. or a combination of both. which was developed by Standing (1999) is set out in Figure 15. The first is the decision to sanction the engineering. or perhaps a social objective. Standing's (1999) project value chain framework (Figure 15.3. .6 The project value chain Value chain activities are the basic building blocks from which an organisation creates value for the customers of products or services. The project value chain concept. resulting from changes in values due to the influence of the organisations involved and a different focus is being applied to the project. Discontinuities can occur. the multi-value system.Supply Chain Management 275 The impact of promoter and demand heterogeneity is consolidated in Table 15. and the second is the handover of the completed facility into the operational domain. There are also other transitional points as different organisations become involved.

.1 Promoter and demand impacts on the supply chain. NA indicates no occurrence. a blank indicates a possible but unlikely occurence.276 Table 15. Promoter type Private sector Less knowledgeable Speculative developers Knowledgeable Public sector Less knowledgeable Engineering Project Management Knowledgeable SCM demand response Consumer Consumer promoters: promoters: small large owner owner occupiers occupier 3 3 3 3 3 Consumer Consumer Speculative Consumer Consumer Consumer Consumer promoters: promoters: developer promoters: promoters: promoters: promoters: small large owner small large owner small large owner owner occupier owner occupier owner occupier occupier occupier occupier 3 3 3 3 Unique Customised Process Portfolio 3 3 3 3 NA NA NA NA NA NA NA NA NA NA NA NA Note: a 3 denotes that this is the probable occurrence.

any change by the contractor must have the promoter's approval. Figure 8. since they are the only party that can sanction change. Profession-led design procurement systems involve additional interfaces and provide more opportunities for disruption to the project value chain. . it is a series of inputs and outputs that create value for the promoter. Single-point responsibility for the whole delivery from concept to operation for the promoter comes to the fore and should.3 The project value chain. One of the most important strategic decisions that has an impact on the project value chain is the choice of procurement route. where the contractor offers a one-stop-shop service. to a greater or lesser extent have the potential for greater integration within the project value chain. The contractor-led procurement systems.Supply Chain Management 277 Project value chain Corporate value Business value Feasibility value Design value Construction value Commission value Operational value Figure 15. 1999.10. which can act as either an enhancer or a barrier to value creation and improvement. No system has a mechanism which permits the contractor to change the design. 15. there is a potential for loss in promoter value. Figure 15. create the capability to maintain the integrity and alignment of the project value chain. Source: Standing.6 is a schematic diagram comparing some of the major procurement systems with the project value chain concept. value should be maintained internally. although once transfered into the multi-value system through procurement. the procurement systems at the top of the diagram provide more opportunity to maintain the integrity of the project value chain. Complexity is added to the project value chain when other value systems impart skills and knowledge to it. depending on the method of tender.7 Procurement and the project value chain Provided that the project value chain remains in alignment. Under profession-led systems. in theory. Whilst the project remains within the promoter value system. or create barriers to its effective operation as an integrated system on behalf of the promoter. Each value transition should be adding value until the complete project forms an asset for the promoter's organisation to meet a corporate need. Schematically. since an increased number of discrete activities come under one umbrella organisation for single-point delivery.

(Tactical) User value system . Figure 8.4 Alignments in the project value chain (adapted from Porter).(Strategic) Designer (consultant) Information Human resources Procurement Development Organisation Brief Generation Evaluation Communication Operator Client Information Human resources Procurement Development Organisation Corporate Business Project Asset Multi-value system .(Operational) Decision to consult Engineering Project Management Client Information Human resources Procurement Development Organisation Information Human resources Procurement Development Organisation Operate Maintenance Renewal Transfer Corporate Business Project Asset Contractor Information Human resources Procurement Development Organisation Estimate Construction Commissioning Operating tender Figure 15. . 1999.278 Promoter value system .1. Source: Standing.

5 Typical value systems and value chains that impinge on the project value chain. Source: Standing.11. Figure 8. 1999. 279 .Promoter value system Promoter's value system User value chain Multi value system User value system Promoter's value chain Financier/ banker's value chain Designer's value system Contractor's value system Regulatory authorities' value system Contractor's value chain Regulatory authorities value chain Internal stakeholder's value chain Project value chain Project value Design value Construction value Commission value Operational value Corporate value Business value Customer's value chain Specialist contractor's value system Project manager's value system Supplier's value system Quantity surveyor's value system Customer's value chain External stakeholder's value chain Promoter's value chain Financier/ banker's value chain Supply Chain Management Regulatory authorities' value chain Figure 15.

Source: Standing.280 Promoter value system – strategic phase Multi-value system – tactical phase User value system – operational phase Project value chain Feasibility value Design value Construction value Commissioning value Operational value Corporate value Business value Engineering Project Management Promoter value system Promoter/ designer value system PFI Consortium value system Consortium value system Promoter value system Turnkey procurement Contractor/designer value system Promoter/ designer value system Operational client user value system Promoter value system Promoter/ designer value system Promoter/ designer value system Promoter/ designer value system Design and construct contractor led design Contractor/designer value system Design and construct client led design Contractor/designer value system Traditional procurement Contractor value system Designer value system Operational client user value system Operational client user value system Operational client user value system Promoter value system Promoter value system Figure 15. 1999.7. . Figure 4.6 Schematic diagram of procurement systems superimposed over the project value chain.

It has the capacity to assist or hinder the transfer of value through the project process. at the bottom of the diagram. overlaid onto the traditional procurement route. They permit increased involvement of engineering knowledge early in the process. supply chain management and continuous improvement. The use of value management and value engineering are methodologies for aligning or re-aligning the project value chain. operating and maintaining a facility. The traditional construction procurement route. that came into effect on 1 April 2000. then there should be increased alignment in the project value chain. however. This requires government clients to think in terms of the life-cycle cost of designing.8 Prime contracting Two major factors have caused the MoD to change its approach to procurement. have the capability of bringing construction expertise into the project much earlier. Turnkey procurement has similarities to PFI.Supply Chain Management 281 The management forms of procurement lie somewhere in the middle of the diagram. The contractual positioning and role of the designers will alter the impact on the project value chain. To summarise. turnkey. but unlike the latter. is probably the most disruptive to the project value chain. including partnering. and has embraced the principles of . The Defence Estates Organisation (DEO) of the Ministry of Defence has taken the initiative with its building down barriers project to adopt a radical approach to procurement. The first is the abandonment of compulsory competitive tendering in the public sector in favour of the best value regime. there is also an interaction between procurement method and choice of tendering strategy in terms of impact on the project value chain. 15. where the designer is independent of the contractor. imposes another value system. the choice of procurement route is a strategic decision made by the promoter and/or its advisors that has a fundamental impact on the demand chain. does. The second is rethinking construction. turnkey procurement does not have the additional requirement and liability for operating the facility. building. If the contractor employs designers in-house. since single-stage competitive tendering occurs at the transition point between design value and construction value. which builds on the Latham Report and has had a major impact on government thinking at all levels. Therefore. or the Egan Report. However. The government is committed to implementing the principles identified in the Egan report. but essentially they are profession-led routes with a consequent increase in the number of interfaces. Two-stage tendering.

building. based on supply chain integration. some similarities with projects delivered under PFI. however. in conjunction with the Tavistock Institute. One is undertaking pilot projects using the new procurement route. prime contracting. The prime contracting initiative was established in January 1997 and ran until late 2000. i. construction and maintenance for a `proving period'.e. set up two pilot projects where prime contractors were given full responsibility for the design. and the other is a research and development theme involving the development of the new procurement process and a `tool-kit' to support it. The prime contractor has single-point responsibility for designing and building. The intention is that the MoD's £2bn per annum procurement regime will be let under the prime contracting route. The DEO. operating and maintaining a facility. and then evaluating the pilots and the tool-kit. British Aerospace Construction Consultancy Services and the Building Performance Group. whereby the number of supplier firms will contract by approximately 90%. which also provides singlepoint responsibility. from concept to operation. and there is a limit to the maintenance and operating period. The distinguishing characteristic of prime contracting from other procurement routes is seen as the requirement for single-point responsibility for the total process. or designing. There are. It was jointly funded by the then Department of the Environment. with benefits accruing in the longer term across multiple projects. The initiative had three primary objectives: (1) (2) to develop a new approach to construction procurement. Transport and the Regions (DETR). the Warwick Manufacturing Group (WMG). the DEO and the MoD. which is called prime contracting. Amec Construction. to demonstrate the benefits of prime contracting in terms of improved value for the client and profitability for the supply chain through two pilot projects. and the value of its main construction contracts will increase to £100±200 m. including an additional focus on operational and through-life costs. (3) There are two main themes to the building down barriers project. John Laing Construction. to assess the relevance of the new approach to the wider UK construction industry. Consultant and trade suppliers became part of the prime contractor's supply chain. The primary differences are that no financing is required by the prime contractor.282 Engineering Project Management supply chain management and strategic alliancing within its new procurement process. .

It has also been viewed as institutionalised design and build. The use of best practice in value engineering and through-life costing as mechanisms to provide better value for money as well as a more transparent view of the cost of ownership. Both prime contracts are based on the core principles listed below. These are set out in Figure 15.Supply Chain Management 283 Prime contracting has already come under close scrutiny by architects.7. The IPT initially starts with the promoter. including procedures for sharing `pain and gain'. Use of open-book accounting. o o o o o o o o o o o Using supply chain management as a fundamental underpinning to prime contracting. cleaning.e. catering. There are five phases in the whole life of a prime contracting project. n planned maintenance. i. Use of output specifications. who have expressed concerns that the prime contracting route will further undermine their professional standing. the `one-stopshop'. A commitment to collaborative working. as set out in the strategic brief. and then incorporates the prime contractor and the supply chain when they are appointed. since the drive will be towards repeat solutions. Warranting fitness-for-purpose for all design and construction work for the intended purpose. and second. The use of a maximum price target cost arrangement. space planning and others. The use of an integrated project team (IPT) as a critical success factor. where the prime contractor will design and construct an asset with a through-life compliance period of approximately 3 years. . including refurbishment. For one-stop-shops. The core conditions envisage prime contracts being divided into two main categories: first. depending on the type of prime contract. Fraud prevention and detection policies adopted by the prime contractor. n soft facilities management services. major stand-alone capital works. Seeking innovative solutions to improve value-for-money and continuous improvement. where the contract period can range between 5 and 10 years. the range of services will include: n capital works. n reactive maintenance. Transfer of undertakings from previous employer (TUPE) arrangements using the MoD's Code of Practice.

284 Engineering Project Management Figure 15. .7 Plan of prime contracting.. Source: Holti et al. 1999.

such as PFI and Prime contracting. seamless teams are outlined below. PFI and prime contracting.9 The operation of future construction supply chains In future. (2000) for improving the delivery of multi-storey steel-framed buildings envisages that strategic supply chain brokers and phased. The globalisation of markets.Supply Chain Management The use of a dispute resolutions board. such as the Latham report. The emergence of the strategic supply chain broker role The emergence of the role of strategic supply chain broker is seen as a natural. team-based routes. as well as more integrated. direct consequence of the UK construction industry having a long and engrained record and culture of adversarial contracting. and will include. PFI and prime contracting . a `general' contractor. are attempts to draw together design and construction interfaces and responsibilities. Regular procuring clients are already pressurising the industry for a `one-stop shop' service. specialist contractors and suppliers of components. the strategic supply chain broker and phased. The concept of the strategic supply chain broker directly assails the adversarial culture of the UK construction industry. especially in the service sector. M4I and the Construction Best Practice Programme. will also increase the pressure for change and attract investment and foreign firms to deliver new types of combined public/private sector projects. there is a clear determination by policy makers that things have to change. They will offer and deliver a total service package to the promoter. and they are very vociferous in their demands for the industry to meet their expectations as customers. Through initiatives already mentioned. from concept through to use. such as management contracting and construction management. 285 o 15. and the need for integrated supply chain management argued for in numerous government initiatives. Newer procurement routes. coupled with cost and time certainty in delivery. the Egan report. the optimum solutions project by Brown et al. Extrapolating from current trends in the industry associated with design and build and more importantly. it is likely that the construction supply chain will be much wider than is currently envisaged. The emergence of. providers of services and facilities managers. seamless teams will emerge in the industry and become the norm. designers and other members of the design team. on a regular basis. coupled with governments' strategies of public sector privatisation in many countries. funders. and pressures for.

the volume broker and the innovative broker. Brokers emerging from this domain would develop brand reputations as `innovative brokers'. tactical and potentially the operational delivery of an asset for a promoter. prime contracting and developments such as MACE's branded product are precursors to the emergence of the broker role. i. allowing engineering solutions. and the requirements of knowledgeable and less knowledgeable promoter. They also tend to be . Use is made of standardised pre-designed buildings and components. innovative or leading-edge. expertise. Optimum solutions research suggests that brokers will compete with their expertise using their supply chain base. The phased.286 Engineering Project Management also incorporate the operational phase.e. seamless team Contractually based relationships highlight the dangers of adversarial interactions developing when things go wrong. and volume brokers would emerge over time who would develop a brand reputation for timely. product components and knowledge. In the industry of the future. for a price. one that will take responsibility for the contracted-out strategic. The key is that the broker is able and willing to take the risk away from the promoter as a one-stop-shop supplier of skills. Approximately 20% of projects can be categorised as technically demanding. regular delivery to cost at an appropriate quality and functionality. The broker role is therefore an organic extension of these procurement options and industry-led initiatives such as that pioneered by MACE with the launch of their `branded product'. systems and architectural component interfaces to be identified and resolved early. quality and speed of delivery are `designed in' from the outset. The requirement here would be for the phased seamless team to be put together to deliver innovative solutions. The branded product is a response to rethinking construction using the core philosophy of a fully integrated design and delivery process that ensures that value. In addition. and would act as one of the drivers for working with the same project teams. approximately 80% of all projects can be categorised as `routine'. at the heart of the branded product are IT/CAD systems that allow work to proceed concurrently. PFI. it is predicted that two main forms of broker would emerge. based on the type of demand that will exist in the industry. The current management forms of procurement would be the drivers behind team delivery for this type of project. Using the Pareto principle. Brokers operating under these conditions would have a pool of leading-edge supply chain members who would be niche providers to the industry. This would form the basis of volume delivery within the industry.

This would lead to savings in both time and money. and hence demand chains. roles. Supply chain management is now on . since they are internal to the team. The seamless team would operate on the basis of a moral and psychological contract founded on trust. and rewards and incentives would be based on performance indicators tied into promoter-focused value and not cost-driven service delivery. regardless of the position within the supply chain. would be familiar with each other's working practices. As the project progresses. To support this. and the supply chain of the main contractor that has to respond to a diverse range of promoter types. Its operations will not be contractually based. Members of these teams. the team would operate with seamless handover processes and procedures. Interfaces would be owned. Seamless teams would pre-exist around a particular supply chain broker. This may militate against securing the right skills at the right time. including a full appreciation of the requirements for appropriate and timely information exchange to allow key project interfaces to operate effectively throughout the supply chain. operate in a cooperative. Under a system where a psychological and moral `contract' based on trust is the founding principle of a relationship. and information flows improved. expectations. through common goals. with different organisational relationships procured at a particular time to suit a particular project programme. responsibilities. through long-term working relationships. and buildability and decision-making to take account of all aspects of the total process. Underpinning the operation of the supply chain broker and the construction supply chain is the phased. deeper levels of commitment can occur. generated through the procurement route adopted. and the principles behind the seamless team would permit concurrency of inputs and skills for the benefit of the project and product.10 Summary This chapter has suggested that the supply chain system in engineering comprises two components. with one task or sequence of events following another. skills and competencies would be known and fully understood among team members. as some new members enter and others leave the team owing to changing task requirements. seamless team. solutions-oriented culture where pooling and sharing of information would occur through a combination of face-toface problem-solving meetings supported by information technology. 15. The seamless team would also provide greater opportunities for more continuity of work and learning. the demand chains of numerous promoters.Supply Chain Management 287 much more linear. Such teams would.

and is no longer seen as an operational issue. In this chapter. o o Professional services. the delivery of professional services. This on-site construction process is highly skills-focused and also forms part of the service sector of the Figure 15. Supply chains in engineering can be classified as under three main headings. It involves thinking about activities within the supply and purchasing function that are internal and external to the firm. These suppliers provide a combination of skills and intellectual property. typically comprising the designers and other professional consultants. falls within the domain of either the promoter's project-focused demand chain or the main contractor's supply chain depending on the procurement route adopted. Implementation and assembly. a tertiary-level provision.288 Engineering Project Management the strategic agenda of firms.8 Engineering supply chain system. Those supplying professional services operate under numerous professional institutional umbrellas. .

These form part of the main contractor's supply chain. Sir J.8 is a schematic diagram of the supply chain system in engineering. 2±541. from which supply chain strategy is developed by the main contractor or. (1998) Logistics and Supply Chain Management: Strategies for Reducing Cost and Improving Service.W. (1999) Building Down Barriers ± The Concept Phase. London. and on-site and off-site labouring. Macmillan Business. (1998) Supply Chain Integration within the Context of a Supplier Association. N. (1997) Stategic Purchasing and Supply Chain Management. J. Holti. Financial Times and Pitman Publishing. Christopher. Croner's Management of Construction Projects.. and will involve the make. It will comprise a range of different types of contractors either with overall responsibility for the management of the process. London. Figure 15. (2000) Optimum Solutions for Multi-Storey Buildings. as research described in this chapter has indicated. DETR Publications. 3. Gatorna. Standing. It involves fitting. R. Nicolini. 2nd edn. J. Interim Evaluation Report. Egan. Financial Times and Pitman Publishing. assembly. S. . Basingstoke.Supply Chain Management 289 o industry. Cranfield University. (1999) Value Engineering and the Contractor. July 1999.P. also by clients to the industry. P. March. unpublished PhD thesis. M. M. and Smalley. In this chapter it is also viewed as a manufacturing process. Final Report to the DETR. Rotherham. pp. References Brown. (1996) Managing the Supply Chain: A Strategic Perspective. Williams. http://www. D. 11. move and store activities to and at a particular site. Further reading Aitken. 17 May. p. Special Report No. and Male. D. (1998) The Egan Report. R. M. and Walters.. unpublished PhD thesis. Gordon. 1. University of Leeds.L.coconet/supplychain/prime-principles/prime-principles. 2nd edn. Rethinking Construction. D. Croner's Management of Construction Projects.html Saunders. p. Materials and products. repair. or for supplying inputs to the process. installation. products and hired plant involved in the on-site process. This comprises the materials..

with cost savings of up to 40%. It will identify which internal processes need attention to make real performance improvements. continuous improvement and issue resolution will be addressed. and recommended its use. Sir Michael Latham. Change and behavioural management specialists can help to accelerate the cultural change programme. in his report `Constructing the Team' (1994).1 Background Partnering has been shown to yield significant savings in time and cost. but there are also problems that need to be overcome. It is the enthusiasm. 16. do not replace the need for competition at the outset of the project. a number of partnering arrangements have been entered into in the UK. whether project-specific or longer term. It is clear that there are a number of advantages to be gained from partnering. commitment and desire for a successful outcome by every individual involved in the project that contributes to its success. so that readers can identify actions within their own project management environments that would lead to partnering. Partnering arrangements. Since then. and their performance has been analysed and compared with alternative contractual relationships.Chapter 16 Team-Based Supply Chains and Partnering This chapter examines the impact of team-based supply chains and partnering on project management performance. Commitment and clear leadership by example and involvement from senior management are required for team working and partnering to succeed. The key areas of alignment. This competition should be on the basis of value for money over the life of the 290 . Longer-term strategic partnering arrangements have been shown to yield the greatest benefits. recognised the role that partnering could play in reducing conflict and improving efficiency in the construction industry within the UK.

to allow us to work better with others. 16. and not on cost alone. commitment and continued involvement from the top down. identifying which personal attributes we need to improve. the success of a project comes down to people. They require leadership. When selecting a project team. When problems or difficulties are encountered. Incentives matched to shared objectives should be included in partnering arrangements to encourage the whole team to provide benefits for the promoter significantly beyond those contracted for (e. partnering and incentives are not soft options that create a cosy environment in which to work. all parties should work together as a team to overcome those problems rather than blame each other. by using innovation or different working practices to deliver the same or better services while yielding cost savings). Team working is the starting point on which relationships with others should be built.2 Team working Team working.g. Team working is defined as working together as a team for the mutual benefit of all by achieving the common goals whilst minimising wasteful activities and duplication of effort. the personal attributes of the individuals should be taken into account. others. It is the enthusiasm. It will need to address each organisation's culture and commitment to work in a collaborative manner to drive down unnecessary costs whilst delivering the required quality. Where it appears that.Team-Based Supply Chains and Partnering 291 facility. the roles and responsibilities of each individual should be clearly set down at the outset. that person should not be selected. Incentives should not just be awarded for doing a good job. actively listening to. To prevent confusion and misunderstanding. and is equally important internally as externally. even with training. Particular attributes required of individuals include: o o o continuously searching for improvement. Ultimately. commitment and desire to succeed that will determine the outcome of the project. It does not replace . They are management techniques that deliver the aspects that are of value to the promoter by eliminating or minimising wasteful activities not directly contributing towards those aspects of value. and learning from. an individual is unlikely to be able to work constructively as part of the team.

reduction in issue escalation. These elements are normally set down in a partnering charter. elimination of `man to man' marking. enhanced reputation of the individual when associated with successful projects. . 16. Co-locating is also believed to have a positive impact on team working. It should encourage greater openness. sets out gain and pain share arrangements (incentives). i. the partnering arrangement and charter do not replace the need for a formal contract. Although there may be a number of standard contracts between promoter and suppliers/contractors there should be a single partnering charter. Where that is not practicable. reduction in the duplication of effort.e.292 Engineering Project Management proper and appropriate management structures. improved working environment.3 Partnering Partnering extends the definition of team working by adding the need for a more formal structure to be agreed by the parties which: o o o o identifies common goals for success. However. sets out an issue-resolution process. identifies the targets that provide continuous measurable improvements in performance. reduction in correspondence. reduced numbers of personnel to monitor progress and prepare claims. A team-working culture can be encouraged by holding team-working workshops and by arranging for team members to undergo teambuilding training. and the earlier involvement of contractors and suppliers. use of collective brain power to find solutions. attention needs to be given to establishing a common virtual environment through intranets and other such mechanisms. cooperation not conflict. The benefits of team working include: o o o o o o o o o understanding each other's objectives. but is a pragmatic way of working together to meet the project objectives.

. . The relationship is based on trust. The Construction Industry Institute Partnering Task Force (1996) defined partnering as: A long-term commitment between two or more organisations for the purpose of achieving specific business objectives by maximising the effectiveness of each participant's resources. but recognition that every business contract includes an implied covenant of good faith. According to the Associated General Contractors of America (1991) partnering is: . some of which are given below. a management approach used by two or more organisations to achieve specific business objectives by maximising the effectiveness of each participant's resources. .Team-Based Supply Chains and Partnering 293 There are many definitions of partnering. the creation of an owner±contractor relationship that promotes the achievement of mutually beneficial goals. . Expected benefits include improved efficiency and cost-effectiveness. It is a method of doing business in which a person's word is his or her bond and where people accept responsibility for their actions. . increased opportunity for innovation and the continuous improvement of quality products and services. an agreed method of problem resolution and an active search for continuous measurable improvements. The Egan Report (Egan. devising a . 1998) states that: Partnering involves two or more organisations working together to improve performance through agreeing mutual objectives. It involves an agreement in principle to share the risks involved in completing the project and to establish and promote a nurturing partnership environment. Partnering was defined by the Reading Construction Forum as: . a way of achieving an optimum relationship between a customer and a supplier. . 1995) The US Army Corps of Engineers (1991) defined partnering as: . Partnering is not a business contract. (Bennet and Jayes. dedication to common goals and an understanding of each other's individual expectations and values. The approach is based on mutual objectives.

The Egan Report definition does identify the key elements that must be present for partnering to exist. excessive or debilitating external party involvement. design and construction profession without the need for unnecessary. and it calls on the simple philosophy of trust. partnering is very difficult to capture in a short definition and that is why a number are presented. commitment and capability. and is the one the author usually recommends. the parties can reap the benefits of cost saving. culture. Partnering arrangements are flexible. The main difference between partnering and other forms of procurement is the shift in the commercial route by which projects are procured. Strategic partnering: A formal partnering relationship that is designed to enhance the success of multi-project experiences on a . promoters are gradually altering their procurement criteria.1 illustrates this process. and may be formal or informal depending on the size. it is suggested that the adoption of partnering proper will lead to greater benefits. These other forms of team-based supply chain arrangements are not being ignored. measuring progress and sharing the gains. all of which lack the structure and objective measures that must support a partnering relationship. is an understanding among all parties involved that they are committed to a plan to anticipate problems and deal with any as they arise. Partnering should not be confused with other good project management practices. but rather. The key to partnering is that it starts at the outset of a project. towards `softer issues' that revolve around attitude. partnering provides the construction industry with a fundamentally different approach to teamwork. and is applied to the selection of the design professionals. This revolutionary management process emphasises cooperation rather than confrontation. In the search for partnering relationships. profit sharing. consultants and contractors/suppliers. or long-standing relationships. From the first handshake to the finished product. such as price and the scope of work. negotiated contracts or preferred supplier arrangements.294 Engineering Project Management way for resolving disputes and committing themselves to continuous improvement. quality enhancement and time management. There is a shift from `hard issues'. Partnering can be either `project-specific' or `strategic'. o o Project specific partnering: A method of applying project-specific management in the planning. What is essential. complexity and scope of the project. respect and long-term relationships. By changing the procurement and completion process. As a concept. Figure 16. however.

long-term basis. Source: ECI. and without these the relationship is unlikely to be successful. These features can also be used by organisations that are not partnering. many suspicions. team members typically do not understand other members' objectives very well at the beginning of the project. Just as each individual project must be maintained. 1997. and what their expectations for themselves and each other are. Mutual objectives Despite a widespread belief that these are obvious to all involved. The principle that adversarial attitudes waste time and money must be mutually accepted. Developing a shared understanding of the mission and clear. . By getting people together to clarify what is important to each of them. a strategic partnership must also be maintained by a periodic review of all projects currently being performed. false expectations and lurking issues are dissipated. but the full benefits will not be realised if the practices are used in isolation.1 The partnering process.Team-Based Supply Chains and Partnering 295 Figure 16. Incentives are an important tool in the achievement of the mutual objectives. detailed objectives is essential to a successful project. The agreed mutual objectives must constantly be kept under review through meetings and effective communication. There are three essential features that characterise a partnering relationship.

identification and aim for best practices. .2 should be followed for a speedy settlement. but that they also aid in planning future projects. Issue avoidance The primary focus is on the prevention or early resolution of issues. The issue resolution process illustrated in Figure 16. Measurement also keeps the partnering team focused on the terms of the partnering agreement. Continuous and measured improvement This on-going process involves a fundamental understanding of customers' requirements.296 Engineering Project Management Partnering is a tried and effective technique for placing the responsibility for anticipating problems early on those best equipped to effect their resolution. Performance targets on which incentives are based must be measurable. In partnering. The evaluation and feedback measures not only ensure that the objectives of the project are met. Incentives can be built into the bidding contract or into the non-binding partnering charter. Early intervention is critical. Partnering is seen as a method of settling conflict and disputes before they become destructive and costly. and they should cover not only cost and time. working methods and other activities that result in added value. and the evaluation of the effectiveness of the improved process. alternative designs. and to identify and implement process improvements. Incentives Incentives should encourage the parties to work together to eliminate wasteful activities that do not add value to the promoter. formal claims are made and costs go up. the issue resolution process is formally designed in `kick-off' sessions between the partnering members so that everyone has a clear understanding of what the process is and agrees to use it. and how things could be improved next time. development of new outputs and processes. but also safety and quality. positions become hardened. because as issues develop into disputes. The partnering concept has been proved to be a powerful participant-driven method of anticipating problems that might be encountered on a project. It is based on seeking `win±win' solutions and not parties to blame. nor should they be given for improvements in performance that are of no value to the promoter. what did not. Incentives should not be given for merely doing a good job. They identify and quantify what worked. implementation of new changes.

. Source: Construction Industry Institute (CII).Team-Based Supply Chains and Partnering 297 Figure 16.2 The Continental divide of dispute resolution. 1995.

the participants must identify the goals. The partnering charter. the essential ingredients of the partnering arrangement are drafted. During the workshop. The facilitator helps develop the partnering workshop and also leads it. and keep the team focused on the partnering process. to make a commitment to them. At the end of the initial partnering workshop. facilitated process. Specific programme issues and concerns. and will generally last at least 2 days. One reason why .298 Engineering Project Management 16. The partnering workshop is just a starting point. and by increasing the facilitator's knowledge of the programme. In most cases. with an action plan being developed for each. identify potential problems and develop a conflict escalation procedure. o o o o o o o The roles and responsibilities for each partnering participant. Keeping the facilitator involved maximises the benefits to the partners by keeping them on the partnering path. The facilitator is a neutral person who helps the partners to get organised from the outset of the process. the number of partners. contract requirements and unique contract administration issues. Techniques designed to improve team communications. or charter. These reviews may involve an assessment of the partnering relationship and follow-up workshops. trust. The workshop may entail both individual and joint sessions with the facilitator. and draw up a partnered agreement. the experience of the participants in partnering. Periodic reviews at regular intervals are critical to success. The workshop is designed to provide a positive partnering atmosphere. The length of the workshop will depend on such variables as the complexity of the contract. develop a plan to achieve them. and the time needed for team-building. and mutual goals and objectives among all the members of the partnership. a facilitator-directed partnering workshop will accelerate the successful implementation of the partnering effort. and is instrumental in encouraging the parties to design their charter. Its purpose is to establish commitment. normally consisting of organising workshops to bring the participants together. The facilitator may also deal with any scepticism or bias brought to the workshop.4 Establishing the relationship Partnering is generally established through a structured. Metrics for the assessment of accomplishments. Conflict management techniques and specific procedures to resolve conflicts among stakeholders. An alternative dispute resolution (ADR) approach.

o o o o o o A statement committing the parties to abide by the aims of partnering. the contract is not an important part of the partnering process. nor does it supersede the contract. Commitment to a safe project with a high-quality outcome. a statement of how the parties intend to conduct themselves. joint evaluations of the charter keep its original objectives in place and underscore their continuing importance. Acknowledgement that relationships may deteriorate due to disputes being left unresolved. It is. Follow-up workshops should also be considered when major players in the partnering process are replaced. From a purist standpoint. in effect. It states each goal in specific terms. While not legally binding. The charter constitutes the first visual instrument of shared partnering commitment. However. The partnering contract should not be allowed to become a barrier to the participants. while the charter is concerned with the working relationships. The contract establishes the legal relationship between the parties. and committed to. Some of the general matters that should be addressed in the charter. or some other indication that it is necessary to reaffirm the process and remind participants of the need for their consistent commitment. The charter is not intended to be a contractual document. During the course of a project. Acknowledgement that problems may occur during the currency of the contract. a formal agreement needs to be established between all parties. are listed below. The charter represents the common commitment of all the participants to the partnering process. Nevertheless. Commitment to monitoring the partnering process performance in accordance with the procedures set up at the workshop. and if there is a breach of the charter or conflict escalation procedure.Team-Based Supply Chains and Partnering 299 it is beneficial to keep the facilitator informed during contract performance is to enhance their involvement in follow-up workshops if they are required. in order to ensure that the new participants are knowledgeable about. the contract . according to the European Construction Institute (ECI). An expression of intent to communicate freely. the process. the charter is a `social contract' about how the team members have agreed to work together. There is no single approach to drafting a partnering charter. which are measured periodically. The partnering charter is the focal point of the relationship and the blueprint for success.

6 Benefits of partnering Supporters of partnering advocate its use by suggesting benefits such as improved efficiency.300 Engineering Project Management should promote and complement the partnering process. Whether there are any guarantees that the consultants and contractors will be appointed for any or all of the individual projects. . They will provide the leadership necessary to ensure that the partnering process moves smoothly throughout the performance of the contract. faster construction. This `champion' will play a powerful and influential role in the process. Whether it provides recompense in the event that either party invokes the termination provisions. reinforce the team approach. reliable quality. No matter how committed management and team participants are.5 Making the relationship work When entering a partnering agreement. They will also communicate with senior management officials to keep them apprised of partnering efforts and to solicit their continuing commitment. o o o o What effect established benchmarking will have upon the improvements striven for by the parties. They will oversee the project. overcome resisting forces. What redress an injured party can claim if the agreement is breached. Flexibility should also be built into the contract to allow for change that may be a result of the continuous improvement or review process. and implementing the tools developed at the partnering workshop. and not contribute to an adversarial relationship. as well as a statement of expectations and objectives. The success of the contract as a working document depends on the commitment to fulfill the mission statement and the charter supporting that statement. They must play a vital role in initiating and energising the partnering process for those on the team. reduced costs. To track. 16. care for and feed the process one individual designated by each partner must assume responsibility. and will generally be at the project management level. celebrate successes and maintain a positive image for the project. participate in the resolution of issues escalated to their level. 16. the partnership will not run itself. there are a number of contractual issues that need to be considered. Champions are more than figureheads.

significant improvements in site safety. and an increased potential to expedite the project through efficient implementation of the contract. The benefits could be summarised as: o o o o o o o o improving cooperation between design and implementation teams. and projects are completed with no outstanding claims or litigation. Much of the interest surrounding partnering is centred on improvements in efficiency and profitability and reductions in costs. and of 30%. continuity of work. The Reading Construction Forum (Bennet and Jayes. in turn. improvements in communication. improvements in morale amongst the project team. speeding up of decision making. 1995) suggested improvements in cost savings of 2±10% for project-specific partnering. reducing potential claims. encouraging the sharing out of identified savings in time and cost. with strategic partnering.Team-Based Supply Chains and Partnering 301 completion on time. giving rise to a product more suited to promoter needs. reduction of disputes and formal claims. reduce delays and inefficiencies. over time. a virtual elimination of time overruns. which will. in their report on partnering arrangements both in the UK and abroad. Various studies have been undertaken on partnering arrangements. a reduction in time taken to reach completion. increasing the willingness to solve design and site problems. Such benefits . an increase in contractor's profits. a reduction in promoter's costs. establishing a relationship between parties that may lead to future work. higher trust levels. sharing of risk. motivating innovation. encouraging good service and improving subcontract quality and timeliness. Major benefits reported by the US Army Corps of Engineers (1991) include: o o o o o o o o o o o o a reduction in overall project costs. a reduction in paperwork and administrative costs. reliable flow of design information and lower legal costs. lower risk of cost overruns and delays because of better time and cost control over the project.

reduced overhead costs and greater profit potential. the promoter and contractor.302 Engineering Project Management appear to stem from the atmosphere of mutual trust and collaboration which exists within a partnering environment. Bringing the team on board early makes it possible to concentrate effort at the beginning of the project. alternatively. safety and productivity can be improved. can offer savings in costs due to reductions in abortive tendering made possible by the price negotiation arrangement. that once the project is underway. pressures will be self-imposed by each member of the team to achieve the targets that they have helped to set. Equity involvement improves the subcontractors' opportunity for innovation and value engineering. An effective partnering agreement can show considerable reductions in the amount of abortive work undertaken. it establishes mutual trust and a commitment to achieve those goals. Efficiency can be considerably improved during the construction phase by focusing on buildability issues. in a similar way to that utilised in serial contracting. and enhanced opportunities for repeat business. This can be extended to subcontractors as well. When a team gets together to set common goals. This is a direct result of a better understanding. Involvement in decision making can avoid costly claims. Through a partnering arrangement. It is also clear that greater savings are likely to spring from a longterm alliance than might be possible where the partnering arrangement only lasts for one project. There are bound to be improvements in working methods and communication systems resulting from the evolutionary development of the partnering relationship. Further savings may accrue from a reduction in variations. then. project quality. meanwhile. better and more reliable programming. . The design process itself can also benefit from the contractor's contribution. of the promoter's needs from the early stages of the design process. It is not surprising. Subcontractors may be a part of the partnering arrangement or. can provide the contractor with a reduced price for `guaranteed' work. The contractor. Additional benefits to the subcontractors include an improved cash flow. by all concerned in the partnering arrangement. There are also benefits to be gained from the use of participative management techniques in partnering arrangements. The contractor is able to develop a special relationship with the promoter which is similar to that of a design and build contract. Partnering provides the appropriate environment to discuss the client's requirements and to develop strategies for achieving them. By replacing the potentially adversarial atmosphere of a traditional owner±constructor± engineer relationship with an environment of trust and enhanced communication to achieve a set of common goals.

1992) observed the difficulties inherent in achieving successful partnering. It has been estimated that in a traditional contract arrangement. This procedure identifies the roles and responsibilities of individuals from both client and contractor. Rather than the parties developing individual positions on issues. In her studies of partnerships in many types of organisations.Team-Based Supply Chains and Partnering 303 normally adversaries in the construction process. Contractual relationships within the construction industry have been founded on mistrust and adversarial practices. partnering also entails risks that should be evaluated. Despite the potential advantages and benefits that can be derived from a partnering relationship. Rosabeth Moss Kanter (quoted in Moore et al. Therefore. the parties determine how they will manage any conflicts that might arise. which is focused upon the accomplishment of the parties' mutual objectives. trust and commitment by all the parties concerned. approximately 30% of the total project cost can be attributed to the employment of layers of additional. even contractors are beginning to appreciate the reduced exposure to litigation through open communication and issue resolution strategies.. staff. `Win±win' thinking is an essential element for success in this process. Partnering focuses on the mutual interests of the parties. a new partnering culture that will replace the old adversarial practices has to be developed. often unnecessary. At the outset of the relationship. The commitment to resolve disputes informally at the earliest opportunity minimises the necessity for litigation in administrative and judicial forums. and provides for the automatic elevation of issues through several organisational levels to avoid inaction and personality conflicts. 16. Avoiding the considerable expense and delay attributable to litigation frees the partnering participants to concentrate their efforts on successful and timely contract performance. are prepared to deal with situations together. partnering engenders a team-based approach to issue identification and problem resolution. This is often accomplished through a conflict escalation procedure. both promptly and effectively. While the partnering concept was developed by promoters.7 Constraints to partnering Perhaps the greatest concern regarding this method of working relates to the need for openness. In her view `The fragility of interorganisational alliances stems from a set of common . which are not easy to discard in favour of a more open-minded approach.

(1992) reported four major `roadblocks' to success.304 Engineering Project Management ``dealbusters'' ± vulnerabilities that threaten the relationship. Uneven levels of commitment. this is not acceptable in a partnering arrangement. the strategy within each organisation may change and even revert to an `us versus them' attitude. o o o o A shift in business conditions. even more so than single corporations. The representatives from each side must constantly work to maintain the health of the partnership. However. The public sector has been cautious about partnering arrangements because of concerns regarding government policy or European Commission directives. This renders the designers not accountable for the consequences of their management. because of the complexity of the interests in forming them. the UK government issued a strategy for government procurement which clarifies the ground rules. These specialists have to learn to work together if they are to achieve successful project completion. Lack of momentum. Failure to share information. Part of the problem has been the increasing use of specialisation in project teams. where success depends on the commitment of every party to the common goals. Partnering requires timely communication of information and the maintenance of open and direct lines of communication among all members of the partnering team. not only in terms of quality. nor do partners want to commit fully until trust has been established. but will have no financial responsibility. noted that the specialist is the `dedicated. Partnerships are dynamic entities. the architect will be given the management role of both the design and construction phases of the project. with unanticipated technical problems and cost overruns. A partnership requires nurturing and development throughout the life of the project. The failure to share information is most likely to arise when team members revert to past practices. singleminded professional who provides knowledge and skills in rare supply'. It is only as events unfold that partners become aware of all the ramifications and implications of their involvement. If conditions change and the project is behind schedule. in his research on team roles at work. Recently. Under traditional forms of contract. People often prefer to work as individuals rather than as part of a team committed to common goals. And trust takes time to develop. A partnership evolves. Belbin (1993).' Moore et al. but also in terms of cost and time. its parameters are never completely clear at first. It states . Unevenness of commitment often develops from the basic differences between organisations.

Partnering depends upon an attitude adjustment. Oxford. it does not create a monopoly. Belbin. and Jayes. The aim is not to change any contractual responsibilities. the construction firm does not become over-dependent on the partnering arrangement. J. all parties agree from the beginning to a formal structure that will focus on creating cooperation and teamwork. Partnering changes mind-sets by helping all involved in the construction process to redirect their energies and focus on the real issues associated with achieving the ultimate objective. References AGC (1991) Partnering: A Concept for Success. University of Reading. based on mutual respect. However. It is a challenging endeavour. it is established on clearly defined needs and objectives over a specified period of time. Associated General Contractors of America. Partnering can provide the basis for a `win±win' approach to problem solving. DC. but rather to focus on what really makes the contract documents work: the relationships between the participants. R. it is not a panacea. Working relationships are built carefully. where the parties to the contract form a relationship of teamwork. in order to avoid adversarial confrontation. Reading. Butterworth±Heinemann. (1995) Trusting the Team: The Best Practice Guide to Partnering in Construction. Centre for Strategic Studies in Construction. CII (1995) Dispute Prevention and Resolution Techniques in the Construction . 16.8 Summary Under a partnering arrangement.Team-Based Supply Chains and Partnering that partnering within the public sector will be possible if: o o o o o 305 it does not create an uncompetitive environment. Washington. trust and integrity. The participants must be committed to change and to working in a team environment that fosters `win±win' relationships. S. cooperation and good faith performance. It requires the parties to look beyond the bounds of the contract and to develop a cooperative working relationship that will promote their common goals and objectives. (1993) Team Roles at Work. the partnering arrangement is tested competitively. Bennet.

Sir John (1998) Rethinking Construction. US Army Corps of Engineers. Austin. XVIII(1). London. HMSO. London. CIB (1998) Fact Sheet on Benchmarking. 1995 CII Conference. Implementation Status Report. 18±21. CII (1996) Model for Partnering Excellence. Partnering Task Force. A. European Construction Institute. Beijing. Thomas Telford. Sir Michael (1994) Constructing the Team. London. . (1996) A Review of Partnering Arrangements Within the Construction Industry and Their Influence on Performance. International Council for Building Research Studies and Documentation (CIB). Construction Industry Board. Omaha.ciboard. Egan. ECI (1997) Partnering in the Public Sector. CII (1995) Use of Incentives. London. Dispute Prevention and Resolution Research Team. US Army Corps of Engineers (1991) Construction Partnering: The Joint Pursuit of Common Goals to Enhance Engineering Quality. (1995) Project Partnering: Principle and Practice. Report.polyu. Department of the Environment. Research Summary No.edu. Project Management Journal.htm. HMSO. 23±1. http://www. Loughborough. Working Group 12. HM Treasury (1998) Central Unit on Procurement Guidance Note 4. D. Latham. Thomas Telford. Mosley.bre.hk/careis/rp/cibBeijing96/papers/130_139/138/ p138. HMSO. Moore.. Final Report of the Government/Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry. London. Austin. Construction Industry Institute. TX. C. 102±1. Partnering and Incentives. Charlett. Construction Industry Institute.306 Engineering Project Management Industry. TX. M. Construction Industry Board. Construction Industry Institute. (1992) Partnering: guidelines for win±win project management. pp. W89 Beijing International Conference.org. NE.J. China http://www. Further reading Baden Hellard.htm CIB (1997) Partnering in the Team. and Slagle. Teamworking. Austin. R.uk/factsht. TX. London. Research Summary No.

after a specified time. for principals. both in the United Kingdom and overseas. 17. also finances the project and operates and maintains it over a sufficient period of time to generate a commercial return. the contractor effectively becomes the promoter and in addition to performance. has led a number of organisations to consider its implementation for different types of facilities. ownership of the facility is retained by the promoter for as long as desired. the facility is transferred to the principal and cannot be considered as real privatisation. financed and owned by private companies under concession contracts. The adoption of this form of contract strategy. when a concession contract was granted to provide drinking water to the city of Paris.1 Concession contracts There has been a growing trend in recent years.Chapter 17 Private Finance Initiative and Public±Private Partnerships This chapter considers the concession contract. and is therefore more consistent with the concept of privatisation. In this form of procurement. The transfer element of a BOOT project implies that. usually governments or their agencies. on both a domestic and an international basis and by speculative or invited offers. however. by using concession or build± own±operate±transfer (BOOT) project strategies. In the late 1970s and early 1980s some of the major international contracting companies and a number of developing countries began to explore the possibilities of promoting privately owned and operated 307 . often referred to as a concession contract. In a BOO project. to place major projects into the private sector rather than the traditional domain of the public sector. ambitious projects such as the Suez Canal and the Trans-Siberian Railway were constructed. During the nineteenth century. Privatised infrastructure can be traced back to the eighteenth century.

operate build. operation and maintenance of a facility over the period of the concession. to designate a `build. own. transfer build. build. to a promoter. This term is often referred to as the Ozal formula. own and transfer' or a `build. rent.308 Engineering Project Management infrastructure projects financed on a non-recourse basis under a concession contract. Turgat Ozal. operate build. operate. operate. subsidise. operate. at no cost to the principal. operate and transfer' project. sometimes referred to as a concession contract. operate. During the concession period the promoter owns and operates the facility and collects revenues in order to repay the financing and investment costs. 17.2 Definition of concession projects A build±own±operate±transfer (BOOT) project.aintain and operate the facility. lease design. but which have broadly adopted the main functions of the concession strategy. although some denote projects which differ from the above definition in one or more particular aspects. a fully operational facility. build. may be defined as: a project based on the granting of a concession by a principal. transfer build. usually a government. own. Other acronyms used to describe concession contracts include: FBOOT BOO BOL DBOM DBOT BOD BOOST BRT BTO BOT finance. . operate. financing. transfer. operate. own. maintain design. m. The term BOT was introduced in the early 1980s by the Turkish Prime Minister. transfer build. operate. deliver build. transfer build. who is responsible for the construction. sometimes known as the concessionaire. and make a margin of profit. build. transfer Many of these terms are alternative names for concession projects. before finally transferring.

Private Finance Initiative and Public±Private Partnerships


17.3 Organisational and contractual structure
A typical concession structure, illustrating the number of organisations and contractual arrangements that may be required to realise a particular project, is shown in Figure 17.1. The key organisations and contracts include those listed below. (1) Principal. The principal is responsible for granting a concession and is the ultimate owner of the facility after transfer. Principals are often governments, government agencies or regulated monopolies. The structured contract between the principal and the promoter is known as the concession agreement. This is the document which identifies and allocates the risks associated with the construction, operation maintenance, finance and revenue packages, and the terms of the concession relating to a facility. The preparation and evaluation of a BOOT project bid is based on the terms and project conditions of the structured concession agreement (SCA). Promoter. The promoter is the organisation which is granted the concession to build, own, operate and transfer a facility. Promoter


Figure 17.1 Organizational and contractual structure for a concession contract.


Engineering Project Management organisations are often construction companies or operators, or joint venture organisations incorporating constructors, operators, suppliers, vendors, lenders and shareholders. The following organisations and contracts may be included within the BOOT project strategy. (1) Supply contract. This in a contract between the supplier and the promoter. Suppliers are often a state-owned agency, a private company or a regulated monopoly who supply raw materials to the facility during the operation period. Offtake contract. In contract-led projects such as power generation plants, a sales or offtake contract is often entered into between the user and the promoter. Users are the organisations or individuals purchasing the off-take or using the facility itself. In market-led projects however, such as toll roads or estuary crossings, where revenues are generated on the basis of directly payable tolls for the use of a facility, an off-take contract is usually not possible. Loan agreement. This is the basis of the contract between the lender and the promoter. Lenders are often commercial banks, niche banks, pension funds or export credit agencies who provide loans in the form of debt to finance a particular facility. In most cases, one lender will take the lead role in a lending consortium or a number of syndicated loans. Operations contract. This is the contract between the operator and the promoter. Operators are often drawn from specialist operation companies or companies created specifically for the operation and maintenance of one particular facility. Shareholder agreement. This is a contract between the investors and the promoter. Investors purchase equity or provide goods in kind, and form part of the corporate structure. These may include suppliers, vendors, constructors and operators, and major financial institutions, as well as private individual shareholders. Investors provide equity to finance the facility, the amount often being determined by the debt/equity ratio required by the lenders or the concession agreement. Construction contract. This is the contract between the constructor and the promoter. Constructors are often drawn from individual construction companies or a joint venture of specialist construction companies. Constructors can sometimes take, and have taken, the role of promoters for a number of concession projects both in the UK and overseas.






Private Finance Initiative and Public±Private Partnerships


17.4 Concession agreements
The concession agreement is an agreement which forms the contract between the principal and the promoter, and is the document which identifies and allocates the risks associated with the construction, operation and maintenance, finance and revenue packages and the terms of the concession relating to the facility over the lifetime of the concession before transfer of the facility to the principal. A statutory concession agreement is adopted when governments are required to ratify a treaty which may lead to legislation and consequent concessions. The terms of a concession granted under statute may usually only be altered or varied by the enactment of further legislation. Under this form of agreement, the promoter (concessionaire) would be required to enforce his rights by making an application to the courts for a judicial review of a principal's (government's) actions. In the case of concessions granted under statute, third parties may potentially have the right to apply to the courts to enforce provisions of the concession which the government do not wish to apply. A statutory concession agreement was adopted for the Channel Fixed-Link project. The contractual concession agreement is often adopted when one government organisation enters into an agreement with a promoter to undertake a specific concession. In the contractual agreement either party may amend or relax the terms of the agreement. Under such an agreement any breach of the concession by the principal would entitle the promoter to damages, and in some cases specific performance of the terms of the concession. In the contractual concession, only the parties to the concession can enforce the terms. A contractual concession agreement was adopted for the North±South Expressway in Malaysia. In some cases, the concession agreement is a hybrid form of both contractual and statutory elements. This form of agreement is often adopted when a principal or promoter requires an element of legislative control and the benefits associated with the contractual agreement. If, for example, planning consent is considered a major requirement for the implementation of the concession, then a statutory element may be incorporated into the hybrid form to cover this requirement.

17.5 Procurement of concession project strategies
Concession projects are procured by invited tender from the principal, or by a speculative bid from a promoter group to an individual principal. In


Engineering Project Management the case of an invited bid, many elements of the risk may be determined by the terms of invitation. In the case of a speculative bid, the promoter will need to approach the principal to determine his obligations under the terms of the concession agreement. About 60% of concession projects are awarded as the result of speculative tendering, but within the EU this percentage is much lower.

Speculative bids A speculative bid is one where a promoter approaches a principal with a proposed scheme which is considered commercially viable by the promoter, and requests the principal to grant a concession to the promoter to build, own and operate a facility for a defined period of time before transferring the facility to the principal. A speculative bid is for a concession usually undertaken by the principal, and requires the promoter to prepare a concession agreement as the basis of the bid. Many concession projects begin when promoters approach governments privately to propose a much-needed project which government finds difficult to finance from the public sector budget. In projects involving new transport infrastructure projects, a speculative bid is considered as one in which the private sector promotes an innovative project from concept to meet a perceived market need. Invited bids An invited bid is one by which the principal invites a number of promoters to bid in competition for the privilege of being granted a concession to operate a facility normally undertaken by the principal or one of their organisations. An invited bid is often a solicitation of bids based on a speculative proposal made open to tender. In the case of invited bids for transport infrastructure projects, a route will have been through a public enquiry, and the public sector seeks the support of the private sector to design, build, finance and operate this route, or where the government has defined the transport corridor and requires the private sector to select the actual route, acquire the land, and design, build, own and operate the project on the basis of a time-limited concession. In the UK, the practical consequence of privately financed projects requires each project to be authorised individually by an Act of Parliament. In invited bids such as the Dartford River crossing, a hybrid bill procedure was adopted to authorise the project's go-ahead, and the invitation involved:

Private Finance Initiative and Public±Private Partnerships


o o o

the identification by the government of a corridor for the proposed route; a competition for the financing, building and operation of a road serving the corridor, inviting bids from private companies; the promotion by the government of a hybrid bill to authorise the road, the tolls, land acquisition and arrangements for the concession.

Competitive bids for concession projects should follow the normal procedures of awarding public works projects. Ideally, the government would identify the project and define the project specifications, the nature of government support, the proposed method of calculating the toll or tariff, the required debt/equity ratio and other parameters for the transaction. The government would then invite preliminary proposals, with the winner being selected on the basis of normal competitive criteria such as price, experience and track record of the promoter, or on the basis of side benefits for the host country.

17.6 Concession periods
Concession periods are sometimes referred to as a lease from government. The concession period normally includes the construction period as well as the operation and maintenance period before transfer to the principal. However, in the case of the Shajiao Power Plant constructed in China, the concession period of 10 years excluded the construction time. In the Macau Water Supply Project, the concession period of 35 years included the refurbishment of existing plants rather than the construction of new facilities, but it also permitted the principal to repurchase the rights if deemed necessary. Such an agreement also permits the concession to be extended by mutual agreement of the parties, which in effect constitutes an addendum to the contract. A provision for an extension of the concession period, in this case the operating period, may be included in the concession agreement to protect a promoter against a principal defaulting on contractual obligations, which may result in projected returns not being met. Typical concession periods range from 10 to 55 years when granted by governments under a concession initiative. In infrastructure projects, the concession period is often longer than in industrial facilities. Concession periods of between 10 to 15 years may be financed successfully, but principals need to accept that the project economics must be strong enough to bear the enhanced depreciation rate over such short periods, as well as the return required on the capital investment. In the Dartford crossing project, the concession period was a


Engineering Project Management maximum of 20 years, which could be terminated at no cost to the Principal as soon as surplus funds had been accrued by the promoter to service all outstanding debt. The concession period should be sufficient to:
o o

allow the promoter to recover his investment and make sufficient profit within that period to make the project worthwhile; but not allow the promoter to overcharge users when in a monopolistic position having already recovered his investment and made sufficient profit.

The commercial viability of a concession contract, and the difficulty and uncertainty of predicting revenues over long periods of time, is a major obstacle to many promoter organisations. If there is flexibility in the concession agreement to adjust the concession period, then this may reduce the promoter's risk and allow predicted revenues to be achieved.

17.7 Existing facilities
In a number of concession contracts, an existing facility is included as part of the concession offered or requested. This may be a requirement of the principal in an invited bid, or offered as an incentive by a promoter in a speculative bid. In some industrial/process facilities, however, a promoter may only agree to tender a particular project provided he is given operational control of an existing facility which may effect the performance of the facility to be tendered. The operation of an existing facility often guarantees the promoter an immediate income which may reduce loans and repay lenders and investors early in the project cycle. The commercial success or failure of an existing facility must be considered by the promoter at the bidding stage in order to determine the success or failure of the proposed concession. Principals can influence pricing mechanisms by making existing facilities available to promoters, who are capable of earning revenues during the construction period. In the case of the Sydney Harbour Tunnel project, revenues generated by the existing bridge crossing are shared between the principal and the promoter, which enables the Promoter to generate income to service part of the debt prior to completion of the tunnel. Assets capable of producing earnings which can be used to pay capital costs, debt service and operating expenses are a familiar feature of

Private Finance Initiative and Public±Private Partnerships


concession projects. A concession to operate a section of an existing highway generated US$16 million to the promoter of the North±South Expressway in Malaysia. The concession to operate existing tunnels as part of the Dartford Bridge crossing concession offered an existing cashflow, but required the promoter to accept the existing debt on those tunnels. An existing concession also formed part of the concession agreement for the Bangkok Expressway; this arrangement required the operation and maintenance of an existing toll highway, with generated revenues being shared between the principal and the promoter.

17.8 Classification of concession projects
Concession projects may be classified on the basis of the method of procurement, the type of facility, the location of the facility and the method of revenue generation. Speculative ± invited In the case of a speculative bid, the promoter will determine which costs and risks should be borne by his own organisation, and which by the principal and other parties involved. In an invited bid, the principal will determine the concession and the costs and risks to be borne by the promoter under the terms of invitation. Infrastructure ± industrial/process The components of each of the packages of an infrastructure project will contain different costs and risk levels to those considered for an industrial or process plant. An infrastructure project may require large capital expenditure during construction, but operate on a small budget. A process or industrial facility, however, may require a low capital expenditure, but require a high operating budget over the operation phase. The number and types of risks associated with a concession project may often be determined by the type of facility and the number of contracts and agreements to be included. Infrastructure facilities may often be considered as static or dynamic facilities. A road or fixed-bridge facility may be considered as static, since the facility offers no moving parts and requires no input of raw materials or power. A static facility will usually have a smaller operation and maintenance cost than a dynamic facility. A light transit railway


Engineering Project Management facility will require a major power source during the operation phase, which will result in operational costs being higher than those of a static facility.

Domestic ± international The location of a project will determine the host country's political, legal and commercial requirements, which will be a major factor in project sanction. In the case of a domestic project, the promoter will often be aware of the country's requirements and have access to local financial markets. In international projects, promoters may need to carry out incountry surveys to determine the risks associated with meeting the requirements of the concession and how revenues may be repatriated to service loans. In effect, each international project will be determined by the constraints of the host country's government.

Market led ± contract led One of the major risk areas associated with concession projects is the generation of revenues, which often leads to market-led revenues being far more uncertain than those based on predetermined sales contracts. The commercial risks to be considered in a concession project are often determined by the revenue classification. The demand for a toll road which depends solely on revenues from users may be much lower than was forecast at the feasibility stage. This may be due to increased costs of fuel, or a reluctance to pay tolls by users. In the case of a water treatment plant, revenues will be contract-led, and provided demand is met and an effective price variation formula takes inflation into account, a promoter may consider the risk associated with revenue negligible compared with other risks. In a number of market-led projects, promoter organisations will often seek contract-led revenue streams to reduce the risks associated with revenue generation. In a toll road facility, promoter organisations may approach haulage contractors and enter into take-or-pay agreements for the use of the facility. In effect, the promoter organisation is providing lending organisations with a guaranteed source of revenue, which will reduce the risks associated with the finance package. In summary, the number of organisations, contracts, data and resources required to meet the project, and the major risk areas, will be determined by the classification of the project.

bridges and tunnels. since the prices paid by users are often low. Developing nations are receptive to the idea of funding such projects under a concession strategy. and with tourism and recreation such as airports. and as such have a political dimension of public good which does not occur in other private financed projects. hotels and resorts. However. and returns on equity from project revenues. infrastructure and fixed investments. which will often reduce the capital and operating costs and also reduce the risks normally borne by the principal. and the commercial viability of a project which affects the profitability rather than the facility itself. light rail trains and hectometric transport. the promoter must cover operating expenses. with industrial growth such as power. since a private economic equilibrium is obtainable. Provided sufficient demand exists for these projects. which are defined below. mass-transit railways and power generation. The most successful concession projects will be those in the small to medium range up to US$500m. revenue streams can be identified and the commercial viability can be determined by promoters and lenders. In a concession project. and hydroelectric facilities are considered suitable projects. 17. water. The characteristics of concession projects are particularly appropriate for infrastructure development projects such as toll roads. Tolled highways.10 Risks fundamental to concession projects The two types of risk which are fundamental to concession projects are elemental risks and global risks. The two most fundamental constraints on project development are economics and finance. . interest and amortization of loans.9 Projects suitable for concession strategies Concession projects are a means of meeting the needs associated with population growth such as housing.Private Finance Initiative and Public±Private Partnerships 317 17. and environmental concerns such as waste incineration and pollution control. water sanitation and transportation. However. subsidies are often necessary for high-speed train networks. as private sector equity requirements for such projects are usually obtainable. gas or oil pipelines. Any public service facility which has the capacity to generate revenues through charging a tariff on throughput may be considered suitable for a concession strategy provided that suitable financing can be achieved. and governments generally prefer to control prices. promoters often consider the suitability of a project based on global market forces.

and these can be summarised as: o o o failure at several stages of the project. performance and operating risk.e. delays.318 Engineering Project Management (1) (2) Elemental risks are those which may be controlled within the project elements of a concession project. Promoters are exposed to risks throughout the life of the project. the risk that the project will not be completed on time and to budget. There are two phases when risks associated with financing concession projects occur. The major risk elements of a concession project may be summarised as: o o completion risk. revenue collection and political issues are major factors in concession projects. and theoretical risks such as contractual obligations. the construction phase and the operation phase. the post-completion phase relative to operational risks. Risks associated with market prices. Risks encountered on concession projects may also include physical risks such as damage to work in progress. failure in the later stages of the project when considerable amounts of money have been expended in development costs. with elemental risks either being retained by the promoter or allocated through the construction. the risk that the project will not perform as expected.e. with the first few years of operation being the major operation risk. Many of the global risks are addressed and allocated through the concession agreement.e. i. Global risk are those outside the project elements which may not be controllable within the project elements of a concession project. i. injury to third persons. These two distinct phases are considered as: o o the pre-completion phase relative to construction risks. . force majeure. damage to plant and equipment. technology. revenue loss and financial guarantees. i. financing. operation and finance contracts. failure of the project to generate returns or the opportunity to recover costs.

Facilities producing an off-take bear the risk of product obsolescence. existing facilities or site. manage project implementation.e. i. The process of developing a concession project is immensely complicated. The major components of a concession project include the agreement to: o o o o build. force majeure. and receive off-take payments. i. ownership of licence. and breach by the principal of specific undertakings provided in the concession agreement. risks associated with demand and market forces.e. i. time-consuming and expensive. and competition usually leads to dominant market risks. carry out procurement. construct and finance. patents.e. insurable risks.e. i. 17. i. manage and operate plant. i. operate. own.e.Private Finance Initiative and Public±Private Partnerships 319 o o o o o o cash flow risk. risks associated with sovereign risk. risks associated with equipment and plant are commercially insurable risks. commercial risk. especially when operation and maintenance costs are high and concession periods are short. i.e. the risk of interruptions or changes to the project cash flow. . hand over plant in an operating condition at the end of the concession period.e. i. social and environmental considerations which have to be taken into account when preparing concession project submissions.e. i. commercial. uninsurable risks. since an infrastructure project is static and cannot normally find another market. deliver product or service. whereas a product may be sold to a number of off-takers throughout the life of the concession. and an appreciation of the political. i. the risk that inflation and foreign exchange rates will affect the project costs and revenues. legal. transfer. design.e.11 Concession package structure A concession project structure is a highly sophisticated structure requiring the full participation of all the parties involved in identifying and allocating the relevant project risks and responsibilities. inflation and foreign exchange risk. Demand risks associated with infrastructure projects are much greater than those for facilities producing a product off-take.e. political risk. carry out maintenance.

assignment of revenues. (2) (3) (4) This structure incorporates all the components of a concession contract into discrete packages over both the pre-completion and postcompletion phases of the concession period. currency contracts and debt service arrangements. construction. shareholder agreements. supply. . guarantees. standby loan agreements. The package structure provides a rational basis for financial appraisal of concession contracts. warranties. toll or tariff levels. and in some cases the early stages of operation. and for the structure of the tendering process. (1) Construction package: containing all the components associated with building a facility. normally undertaken in the pre-completion phase. equity finance loan. Financial package: containing all the components associated with financing the building. maintenance. licences and power contracts. consumables. site investigation. so that an equitable risk allocation may be determined. toll or tariff structures and revenues from associated developments. The type of facility. insurances and legal contracts. and may include demand data. design. supervision. and may include operation. where applicable. Concession contracts may be determined by the four major packages described below. Having identified and allocated the components into the four packages. training. insurances.320 Engineering Project Management The number of components and their timing over the concession period need to be identified at an early stage of a project. Operational package: containing all the components associated with operating and. commissioning. and may include feasibility studies. Revenue package: containing all the components associated with revenue generation. off-take. for the allocation of risk within the concession agreement and contractually between the parties concerned. a promoter organisation could then determine the risk associated with each package and how such risks would be shared. land purchase. This should be addressed in a format that can be utilised to identify the obligations and risks of each organisation involved in the project. owning the facility. and may include debt finance loan. transfer. its location and revenue realisation would effectively be contained in one of the packages. procurement.

The most important attractions to governments of Asian developing countries is off-balance-sheet financing. the disadvantages. Benchmark: the usefulness to the host government of using a con- (3) (4) .: o o o o o o o o o o promotion of private investment. additional financial source for priority projects. The involvement of the private sector and the presence of market forces concession schemes ensure that only projects of financial value are considered. no inroads on public debt. Efficiencies: the promoter's control and continuing economic interest in the design. The introduction of new technologies. a positive effect on the credibility of the host country. there is a specific need for the project.12 Advantages and disadvantages of concession projects A concession project may offer both direct and indirect advantages for developing countries. There are six main arguments for concession projects. Credibility: this would suggest that the willingness of equity investors and lenders to accept the risks would indicate that the project was commercially viable. A major advantage of a concession project is the financial advantage to a government. transfer of new and advanced technology. being host-country constraints and financial market constraints. no burden on the public budget for infrastructure development. as its off-balance-sheet impact does not appear as a sovereign debt. new foreign capital injections into the economy. project design and implementation.e. good management and efficient operation.Private Finance Initiative and Public±Private Partnerships 321 17. however. utilisation of foreign companies' resources. and management techniques are considered as advantageous to developing countries. (1) (2) Additionality: this would offer the possibility of realising a project which would otherwise not be built. construction and operation of a project will produce significant cost efficiencies which will benefit the host country. transfer of risk. The advantage to an overseas principal is that they do not need to compete for scarce foreign exchange from the state purse. speedy implementation and an acceptable face of privatisation. and risks are transferred to the promoter. i. completion of projects on time without cost overruns.

the length of concession periods.e. the availability of experienced developers and equity investors. (2) (3) Although there are a number of advantages and benefits associated with concession projects. since the revenues generated by the operational facility must be sufficient to pay for construction. (1) Additionality: commercial lenders and export credit guarantee agencies will be constrained by the same host country risks whether or not the concession approach is adopted. Credibility: this benefit may be lost if the host government provides too much support for a concession project. The uncertainty of demand. the effects of commercial. the ability of governments to provide the necessary support. Technology transfer and training: the continued direct involvement of the project company would promote a continuous transfer of technology. the levels of tolls and tariffs. A strong training programme would leave a fully trained local staff at the end of the concession period. money. The overall cost to a host government is greater than that for traditional public sector projects. the cost of finance. The risks associated with concession projects are far greater than those considered under traditional forms of contract. resulting in the promoter bearing no real risk. Complication: a concession project is a highly complicated cost structure which requires time. .322 Engineering Project Management cession project as a benchmark to measure the efficiency of a similar public sector project. Privatisation: a concession project will have obvious appeal to a government seeking to move its local economy into the private sector. although proponents of the concession approach argue that overall costs are less when design and operating efficiencies are taken into account and compared with public sector alternatives. patience and sophistication to negotiate. which would ultimately be passed on to the host country. and finance. and the workability of corporate and financial structures. political. and hence revenues. A review of concession schemes by an EU Commission concluded that there were three key problems associated with concession projects. i. operation and maintenance. and bring to fruition. (5) (6) There are three main arguments against concession projects. legal and environmental factors are only a few of the risks to be considered by promoter organisations. very few concession proposals have reached the construction stage.

the obvious one being a pure private finance case where a facility and service is provided at zero. and power stations in Italy. Many of these projects had foundered by the beginning of the twentieth century. The trend back toward concessions started to emerge during the mid-twentieth century in the USA. This has forced governments to rethink their procurement strategies.Private Finance Initiative and Public±Private Partnerships 323 17. with French canals and bridges being privately financed in the eighteenth century. Concession contracts have been utilised in the past. The public sector is characterised by substantial cost overruns and poor management skills. with most major infrastructure projects having a government-financed structure. with PFI-type schemes becoming more popular throughout Europe. including toll roads in France and Spain.13 The origins of PFI The private finance initiative (PFI) was a policy born out of a series of privately financed projects. and corresponded to a growth in the financial markets and their ability to finance such complex projects. put forward by many as the perfect PFI project. There is particular emphasis on reducing public expenditure . A privately financed public sector is not a new concept. cost to the public sector. Other transport-orientated projects followed swiftly: the second Severn Crossing. or minimum. especially in the emerging economies in Asia. The pressure on public finance is not restricted to Europe. beginning with the Channel Tunnel project in 1987.14 The arguments for privately financed public services The underlying principle behind the introduction of private sector finance has many dimensions. the Dartford Bridge. where a turnpike system saw owners collect money from the users of the roads. and the railways in the United Kingdom in the nineteenth century. Toll roads were common in the eighteenth and nineteenth centuries in both the UK and the USA. It is also the public sector's exploitation of the private sector's ability to design and manage more efficiently. the Manchester Metrolink and London City Airport. utilising PFI may reduce these inefficiencies. There is a pan-European downward pressure on public capital budgets. there is growing interest in the use of private finance all over the world. 17. At present there is an interest in concession contracts throughout Europe. Spain and Portugal. the Skye Bridge. An example of this is the second Severn Bridge.

. and if they do. To introduce . o o o o To minimise the impact of added taxation. o o o o Efficiencies may well be available in the private sector. but the overall time from conception to operation will be far longer than for a conventional project. To promote private and entrepreneurial initiatives in infrastructure projects. or may not. but a global objective. Therefore. Arguments against the concept include those listed below. but it is argued that such management efficiencies might not materialise. debt burden. reducing the public sector borrowing requirement (PSBR) through PFI will only go towards meeting this target if the PFI project `. who benefits? Construction efficiencies are also visible. occur from private sector involvement. or restrict. public expenditure is not just a British preoccupation. with construction programmes being reduced owing to a lack of procedural constraints from Government. The reduction in public borrowing and direct expenditure are amongst the factors which encourage the adoption of concession contracts. on the finances of Governments. adds value'. . Hence the need to cut. it must be noted that the targets set under Maastricht are subject to the European Union's standard measures. Owing to the complexity of concession contracts.324 Engineering Project Management with regard to satisfying the criteria for monetary union under the Maastricht agreement. However. the benefits that might accrue from the use of private sector management and control techniques in the construction and operational phases of the project. etc. . To increase the range of financial resources that might be available to fund such projects. governments and their agencies have to spend large sums in advisory fees for lawyers and financiers . . Financing charges are higher for the private sector than for public bodies. This reduces some of the efficiency benefits which may. This is due in part to the processes involved in the evaluation and negotiations required by such projects. The rationale behind concession contracts and private finance is to achieve the following objectives.

which are provided by the security company Group 4.Private Finance Initiative and Public±Private Partnerships 325 17. These prisons are still operating successfully. construct. which existed in three prisons across the UK including Her Majesty's Prison (HMP) Doncaster and Wolds Remand Prison. According to the Private Finance Panel. manage and finance (DCMF) prisons were a progression from privately operated facilities. PFI prisons The prison sector has been the beneficiary of modest PFI success with privately financed prisons. who find them too high. These costs are passed on to the trust. The existing links within Her Majesty's Prison Service (HMPS) and experience with private operators shows that this sector is well suited to PFI treatment. who joined as consortium members. In the Fazakerley and Bridgend prisons.15 PFI in the UK PFI healthcare There has been massive interest in the provision of services for the health sector which has attracted much negative publicity and a conspicuous absence of signed deals. The success of the pathfinder projects was aided by the government's desire to see PFI realised. and showing `significant cost benefits' over comparisons with existing public sector best performers. This problem arises because of the intensive level of borrowing required by the consortium at the early stages of a project and subsequent debt servicing. Alongside this was the contracting-out of prisoner escort services. and the help they provided reflected this. These ranged from clinical waste incineration and information systems to office accommodation. construction and financing of the asset. In addition to `contractors turned operators' bidding for the project. Their existing track record and the privately operated prisons in the UK meant there was already in place a valuable benchmark by which to evaluate the bids. there was the arrival of the US operator Wackenhut Correction Facilities. Then potential private sector operators should have an input into the design. The natural next step would be to expand the number of prisons by building more. Consortiums responding to output specifications spend large sums of money preparing bids which ultimately are not affordable. A sticking point with high-value PFI hospitals is that trusts do not appear to be very realistic in their requirements. there were 47 signed contracts for PFI service provision for the Department of Health by the end of 1997. the government agreed to act as insurers as a last . Design.

This potentially terminates the concession agreement with premier prisons unless they can reassure the insurers and point to their record of riots and disturbances in Doncaster. particularly of Lowdham Grange. One major contractor has set a minimum of £5 m. Along with other sectors. These regulations are applicable to local authorities and utilities. A project in Germany has seen a developer award a 10-year concession to a small contractor to finance. Examples taken from other countries could show the way forward for schemes such as district heating systems. have hit problems due to the governments' refusal to repeat this agreement. . and the reader should refer to Farrell (1999) for a more comprehensive understanding of the topic. 17. works concession contracts. The procurement strategies to which they apply are: o o works contracts. Local authorities Local authorities have been granted £250 m worth of help to cover advisors' fees to get the PFI process up and running in this sector. It was felt by HMPS that the success of Fazakerley and Bridgend meant that they could transfer greater risks in forthcoming projects. supply and maintain a heating system to two apartment blocks. The follow-up projects. and hence they have a significant impact on the way facilities and services are procured under PFI.326 Engineering Project Management resort if the operators could not obtain commercial insurance. The interesting points about this project were that the capital cost amounted to slightly in excess of DM 15 000 and the project had a net present value (NPV) of just DM 2860 over 10 years at a 10% discount rate. Some contractors have introduced a lower limit for bidding for PFI projects. as no-claims bonuses could be earned. which could effectively prevent such local authority schemes from getting off the ground. They felt that commercial insurance could be an incentive to the operators to maintain an exemplary record when it came to discipline. doubts have been expressed on the viability of smaller-scale projects. They are only covered in brief.16 Bidding and competition This section provides an explanation of the EU procurement rules and how they are applicable to PFI. Local authorities have been looking at projects varying from small-scale heating projects to high-value transport interchange schemes.

This type of approach is not suitable for PFI projects. More widespread is the use of a restricted procedure where bidders express an interest and prequalify in order to bid for a project. and can only use competition and the negotiated approach in the following circumstances: o o if pricing is not possible for the works and services. but usually after winning in a competitive process. This number should not normally be less than three in the case of a restricted procedure and five under the open procedure. it still falls under the regulations applying to works projects. i. It is deemed that the payments for services are taking this expenditure into account. but negotiations can be conducted directly without the need for tenders . as the cost of bidding is too high to allow mass bidding. restricted procedure. The procurement rules mean that the procedure should follow one of three routes: o o o open procedure. Public authorities are usually limited to using the first two methods. The last two methods must take place in an environment where competition is satisfactory. design contests. `contracts under which a purchaser engages a person to provide services and gives him the right to exploit the provision of these services to the public'. even though PFI is concerned with the procurement of services rather than assets. thus PFI projects are treated from the standpoint of a capital works project. However. and are not subject to the regulations. The open procedure allows everyone who has expressed an interest in the project to bid for it. if specifications for services cannot be precise. so that the open or negotiated procedure could be utilised. The reason for this inclusion is the typically high level of capital expenditure in the construction phases of projects.e. The last type of procedure is where the preferred bidder negotiates the terms of the contract. 327 o o o It should be noted that service concession contracts are defined as. negotiated procedure. there must be several bidders in the competition. service contracts.Private Finance Initiative and Public±Private Partnerships subsidised works contracts. The preferred bidder will win the right to negotiate the contract terms.

This puts public bodies in an unusual situation. Competition is not always necessary. In order to give the private sector this freedom. experimental. it is sometimes difficult to separate the service from the facility. This is particularly problematic because of the length of contract periods required to secure the financing of concession-type projects. and this leads to preconceptions of how a service should be run and from what type of facility. exclusive rights exclude other bidders. non-discrimination. study or development purposes.328 Engineering Project Management to be submitted. objectivity. as they remove the freedom of the private sector to innovate and produce alternative solutions. In some cases a negotiated non-competition procedure is allowable if: o o o o technical or artistic reasons mean no-one else can do the job. In addition to the method of procuring a service. as they have to be the authors of a service provision document rather than an asset provision document. This addresses the concern that an excessively long contract period may distort or restrict competition. Although this may seem straightforward. goods are manufactured for certain research. the contract duration may be subject to regulation under Article 85 of the Treaty of Rome. it is important that it adheres to the following principles: o o o o o transparency.17 Output specification One of the guiding philosophies of the PFI is that the public bodies allow the private sector the freedom to determine how they are to provide a service to meet the relevant specification. The private finance panel (PFP) supplies the following examples: . If a negotiated approach is to be used. the principal has to be very careful in the way the requirements are expressed. measurability. 17. it is a works concession contract. Such presumptions should be avoided at all costs. This is achieved through the drafting of an output specification. equality of treatment.

In order to define needs successfully.18 Financing public±private partnerships Increasingly. For example. not how it is to be provided.Private Finance Initiative and Public±Private Partnerships 329 o o o a computer system is not an output. solutions to be evaluated against the defined criteria. the projects which the principals wish to realise are not sufficiently robust to be procured by total private finance funding. provide equal opportunities for all tenders to offer a service which satisfies the needs of the user and which may incorporate alternative technical solutions. thus allowing bidders to develop the best way of achieving the requirements. Most PFI projects can be negotiated. a statement of what you want. Essentially. and it is important that these are clearly and accurately expressed. logical and unambiguous. allow for innovation from tenderers. a local authority may want a new school. Clear specifications should comply with the following list according to PFP guidance: o o o o o o o a clear statement of requirements which is concise. a particular office building is not an output.2. which operate within a strict hierarchy. but there will come a point where the specification must be fixed. but a consortium may develop a bid that includes other facilities such as a leisure centre and an adult education centre. a school gym is not an output. The public sector has four main mechanisms for participation. regular access to sports facilities is. The issuing body must define its core requirements for the project. the information service it supplies is. as this allows bidders to develop and refine the specification. a supply of services accommodation is. This gap between commercial financial analysis and social cost±benefit analysis can only be closed by some type of public sector involvement. provide all the information a tenderer needs to decide and cost the services they will offer. 17. as shown in Figure 17. an indication of the information needed in order to monitor that the service is being procured in compliance with the contract. and in sympathy with the concept of encouraging the private sector to . the approach must be carefully thought out and biased towards services provision.

For risks which cannot be controlled by either party it is usual for the public sector principal to take responsibility because the risk will only have to be paid for should it occur. operation and maintenance of existing facilities. The Greek government then suggested a deferral of the project. revenue. grace periods and soft loans. the public sector wishes to make the minimum possible contribution which is sufficient to reduce the investment risk to levels acceptable to the private sector. This funding was then utilised as a second source of equity to bridge the gap between the level required by the lenders and the equity raised by the promoter. take responsibility for project risk.2 Public±private financial engineering. When originally proposed as a private sector project. . As the first stage. A tax holiday is a predetermined period of time over which the promoter will not be liable for tax on the concession. Once the risk-sharing option has been exhausted and further responsibility for risk is unacceptable to the public sector.330 Engineering Project Management Figure 17. and during this period a hypothecated tax on all airline tickets would be raised. An alternative mechanism was adopted for the new Athens airport at Spata. Often this will take the form of offering the promoter the use. by assuming responsibility for some additional risk. the public sector can consider additional risk sharing. Therefore. the option of additional equity can be considered. this may enhance the robustness of the project cash flow and hence attract investors and lenders at an acceptable rate of interest. using the basic principle that the party best able to control or manage a risk should take responsibility for that risk. Risk is already shared through the concession agreement. Conventionally. Typical indirect options include tax holidays. the debt financiers required equity funding in excess of the levels that any of the tendering consortia were prepared to offer. This stream of revenue at a critical stage of the project can be valuable in closing the gap between debt finance and the equity provision which the promoter is able to raise. rather than a premium being paid to a contractor to cover the possibility of it occurring.

is liable to be taxed on its operating profits in the same way as any other commercial enterprise. but assists the promoter by reducing the debt burden. the Nemzeti Bank. The range of these options can be quite considerable. A soft loan is a loan offered at rates below the commercial market rate. Grace periods and soft loans can be used separately or jointly to assist the financing of the project. and another with the same loan but with a 10-year period of grace and interest at a quarter of the commercial rate. As most infrastructure construction takes between 2 and 3 years. can be repaid. for example. the public sector can provide direct financial investment. it is a grace period of between 5 and 7 years that is of most benefit. and the debt can be re-financed at lower rates of interest commensurate with the known risks of operating similar infrastructure projects. One example is the M1 Vienna to Budapest Toll Road in Hungary. (1999) Financing European Infrastructure: Policies and Practice in Western Europe. Obviously the concession contract has the maximum capital lock-up towards the end of the construction phase. where the National Bank of Hungary. or projects with a marginal cash flow. and after that period the returns diminish. a tax holiday of 5±10 years is likely to be most beneficial. consider the financial implications for two concession consortia. Similarly. made a contribution of 40% of the project value in Hungarian Florints. which carries high interest rates which reflect the risks associated with construction. This may be necessary on projects perceived to be high risk. one with a public loan at commercial rate over 12 years. this can be extremely beneficial to the cash flow of the concession. and if a loan can be effectively extended without interest. in the UK. if no other course of action is available. S. the initial debt financing. Reference Farrell.Private Finance Initiative and Public±Private Partnerships 331 each project is treated as a `ring-fenced' investment and. which is often between 75% and 90% of the capital cost. The public sector loses some of the return which could have been gained. Finally. Basinstoke. Macmillan. Once the infrastructure is completed. . In a number of UK infrastructure projects. A grace period is fixed length of time before which a loan has to be repaid. most light rail transit schemes in the UK and in many other countries are financially non-viable without a major financial grant from the public sector.

.J. Merna. Asia Law & Practice. N. and Merna. Smith.332 Engineering Project Management Further reading Merna. (1997) The private finance initiative. and Smith. Hong Kong. 2. Vol. G. 4(3). (1998) Understanding the Private Finance Initiative. Engineering. and Owen.J. A. 1st edn. Construction and Architectural Management. N. A. Hong Kong. Asia Law & Practice. (1996) Projects Procured by Privately Financed Concession Contracts. A.

This chapter concentrates on this type of project management. supplier and financier. This concerns the abilities of large organisations to manage effectively. These large companies act in a number of roles. This combination of many complex projects occurring simultaneously causes new problems for the project manager. The unique nature of each individual project makes successful project management a difficult task. and organisational and engineering implications. These projects can be regarded as investments with significant risks.Chapter 18 Aspects of Implementing Industrial Projects The current demand for a higher quality of living and greater technological development has meant that large engineering projects are increasing in number and complexity year by year. e.1 Multi-disciplinary projects The current world market recession has placed increasing demands upon the need to manage and deliver multi-disciplinary projects in a more effective way. contractor. The more complex the projects and the greater the number of parties involved. and tend to be involved in a large number of concurrent projects. and offers general guidance for the project manager for both domestic and international projects. One problem in particular is causing increasing difficulty. This has inspired a plethora of project management approaches. although little progress has been made. some new and some revised versions of existing ideas such as programme management and concurrent engineering. operator. the greater the corresponding need for better project management. 333 . 18. This is compounded by the fact that it is difficult to identify the significant problems and risks inherent in multi-project engineering management. promoter. The oil companies are prime examples of this type of organisation. processor.g. which are themselves composed of many sub-elements.

There is a need to address the areas of the processing of information. multi-project management is still regarded as an unsatisfactory balance between sophisticated project management software packages. decision analysis. These companies invest large amounts of money in new projects each year. Flatter. particularly in the more subjective management areas. and conventional corporate decision making at the highest level. methods against new information technology developments. . more flexible organisational structures. but the increasing size of multi-national companies means that multiproject management is likely to become more significant. but determining the priorities of tactical and strategic objectives in multi-project management remains the key issue. are more suited to a project environment. complexities and contradictory demands of large numbers of projects. The increasing size of multi-national companies also means that this subject becomes more important. New information is required about the structure of the multi-project environment and the effectiveness of the `triage' concept of multi-project management decision making. Currently. and it is likely that even small savings achieved by improving multi-project management would produce large returns which could be re-invested in new projects. and there is mutual distrust and misunderstanding of the relative strengths and weaknesses of the two approaches. and if the trend to replace strategic company management with the project management of a large number of concurrent internal and external projects continues. investments and returns but without being able to incorporate the strategic company or organisational needs. Management techniques for multi-project management are the subject of research in many countries. which indicates the need to change the management process and priorities with time. then progress in this area becomes essential. which can view a large number of concurrent projects and optimise resources. The existing approaches seem to be either technically based or management based. The multi-project environment is unique and affects all the areas of the management system and its structure. command structure and inter-personal relationships.334 Engineering Project Management and to balance the cost effectiveness of corporate management. Project management has to address the integration of these two separate levels in the traditional management structure. as discussed in Chapter 8. inter-group communication. which is providing long-term objective and subjective inputs to determine goals but cannot assess the implications. It is always difficult to prejudge the evolution and development of existing systems.

2 Industrial projects The number of discrete and largely single-discipline industrial engineering projects undertaken each year is steadily increasing. . usually when the scope or nature of the construction work is undefined when the contract is entered into. Occasionally. For most projects a comprehensive contract is usual. price and other terms between the promoter and the contractor. The usual practice is to adopt contracts with fixed-price stage payments to the main contractor. based on a specification of the resources the contractor will have to provide and classes of work he may have to undertake. sometimes including rights to licensed processes. the enhanced capabilities of engineers and the availability of private sector investment finance. For these conditions. machines. Many reasons for this trend have been proposed. International promoters usually specify their own detailed design requirements and standards. monthly payment is normal. The contractor might be entitled to extra time and extra payment for a few given conditions. The orders for equipment to vendors in other countries mostly follow the promoters' own conditions of contract. including sub-contractors' and vendors' items unless otherwise negotiated. quality and timing of the work to be done. less retention. but otherwise the contractor is responsible for the design and construction to achieve the required performance. less retention. and seems likely to continue to do so for the foreseeable future. and usually written by the promoter in consultation with the prospective contractors. Many contracts combine payment on a fixed-price basis for predetermined work. usually progressively as decisions are made after construction has started. one comprehensive contract is usual. Instructions from the promoter then define the scope. based on limited competition and then negotiation of a specification. Design is dependent upon detailed information from systems subcontractors and vendors. Sometimes the project management and design teams of the promoter and the contractor are combined. but subject to supervision. The basis of payment to the contractor is not standardised.Aspects of Implementing Industrial Projects 335 18. scope of work. etc. and a day-works schedule of rates per hour or per day for the use of manpower. but there is some agreement that the most significant factor is the relatively recent combination of an increasing world population with the consequent demands for energy and raw materials. and is typically a combination of fixed price and reimbursable elements. entirely cost-based contracts are used. when ordered. but some use the model conditions published by the UN Economic Commission for Europe.

3 Large engineering projects It is necessary to identify the difference between a large engineering project and a complex and expensive conventional engineering project. 20±30%. These investments should be optimised. The terms large. The management of large engineering projects has not been particularly successful. e. and whilst not a problem of semantics. Therefore.336 Engineering Project Management 18. Project risks. and appraisal for loan approval is made on the basis of a combined technical. There are immense differences between public and private large engineering projects. economic and financial assessment. The use of appropriate technology is reviewed at the design stage. For large projects finance is important. Moreover. which may result in the design and construction phases of the project being executed at above minimum cost in order to satisfy the project's objectives. In the public sector. several projects have been abandoned at various stages of completion. the objective is to make clear that these projects have specialist management problems in addition to those encountered in conventional engineering management. super and giant are all used in project management literature. In contrast. indirect completion guarantees and security are not. Although this will usually form a minor share of the total financing package. and . Only then are competitive bids sought from contractors. A more thorough evaluation of the financial suitability is required as the project is not state-guaranteed. the private sector selects projects on the criteria of individual judgement and market principles. it demonstrates the confidence of the promoters in the project. institutional. projects are selected by agreement from a priority list drawn up within a corporate national development framework. jumbo. Investors would be unwilling to consider a project which had little equity capital. the methods and techniques applicable to giant project management would appear to be significantly different from those needed for a standard project. but equity risks.g. but in the project startup and commissioning. the major losses and gains do not usually occur in the operation phase of a project. Giant projects are so difficult to manage successfully that they should be restricted to those which cannot be realised in any other form. and there should be strong credit support from the project's promoters. An alternative approach to identifying large engineering projects is based on the concept of projects as long-term financial investments with considerable engineering implications. debt service and force majeure are acceptable. creditworthiness. and only a few are profitable. technological risks. supply of materials. Many of the projects that are completed break even.

they also introduce the concept of worthwhileness.or limited-recourse loans. and weaknesses at any point usually result in abandonment. the promoters have placed separate contracts for design. Private sector projects have to meet strict criteria. fabrication. and separate contracts for systems. for the very large integral gravity platforms. and a separate contract for the subsequent sea transport of all the above and their installation off-shore. whilst public sector projects often have a strong financial base. The failure of a large engineering project can seldom be tolerated by the project promoters as it could induce corporate or national bankruptcy. laying and connecting. and yet involving large-scale. For pipelines. project parameters. rather than absolute. Therefore risk analyses must commence at pre-feasibility stage and form a continuous and integrated part of the project planning. fabrication. hook-up and commissioning for the first . separate fabrication contracts in parallel for the substructure and the topsides units. equipment. which might include political desirability and other comparative. The conditions of contract have been developed from those used for large industrial projects on-shore. 18. Worthwhileness can be assessed from either a cost±benefit analysis or a subjective points evaluation system. the most typical strategy has been separate design contracts in series for the main structure and for the topsides. long-term construction and future operations in a volatile world market to return the no. For smaller projects. as above. topsides module fabrication. For example. However. with the risk of bankruptcy in the event of project failure.Aspects of Implementing Industrial Projects 337 a higher proportion of the funding may be supplied by the project promoter. the tendency has been to continue the on-shore practice for industrial projects of a comprehensive contract. These projects exhibit a dichotomy of risk by having to attract financial investment and avoid any prospect of failure. but of course differing from on-shore projects in that construction is in the contractor's and sub-contractors' yards up to load-out for installation off-shore. etc. the UK and Norwegian promoters have placed one comprehensive contract for the design and construction of the substructure.4 UK off-shore projects For the large steel or concrete platform projects for the North Sea Oil and Gas fields. installation. The difference in public and private sector projects is again evident. Reimbursable terms of payment were common in the contracts for design.

In no country does the law govern the important choices of deciding the number and scope of contracts. foresee what may change. state their priorities between quality. and then choose terms of contract (so far as is permitted by any mandatory legal rules) which are most likely to control any consequential problems. There also appear to be differences from country to country in the extent that national and EU law is enforced. Unlike the UK. . There are substantial differences in legal regulations between the seven EU countries studied. public liability insurance. and promoters have adopted the package deal. or regulates tendering or the resolution of disputes varies. The respective engineering industries in the EU states are directly affected in terms of design standards. procurement. the public sector projects are subject to more national regulation than the commercial projects. Sometimes. assess what are the risks. but the primary task for promoters in any country is to define what project they want. the use of products and the free and fair competition for EU public works contracts. many EU member states do not tender on the basis of precise quantities.338 Engineering Project Management projects. contractors. Regulation is least in the UK. As would be expected. Procurement methods vary between the member states. but there are three standard methods of tendering for construction work which are used in the majority of member states: open tendering. Legal advice may be needed in preparing and managing a contract.5 Legal systems in the EU countries The terms of contracts adopted in EU countries vary for the obvious reasons of differences in legal systems and the extent to which liabilities and relationships in public works contracts are established by law. or management contract. 18. selective tendering and negotiation. time and cost. but legal regulation is not obviously the main cause of differences in contract arrangements. particular works require specialised skills. registration of engineers. The design and construction of public engineering projects in all countries normally have to conform to standard specifications and codes. but have tended to be replaced with fixed-price terms plus unit rates where appropriate. Nor does the law dictate how contracts are managed. craftsmen and others. but the extent to which legislation requires the certification of design. giving competition on price without the loss of flexibility to cope with uncertainty. which means that a great deal of emphasis is placed on the preparation and clarity of the written specification.

Aspects of Implementing Industrial Projects


Terms of contracts vary between building, infrastructure and industrial projects in many EU countries, and they vary with the size of the project. One model set of conditions of contract dominate construction in one EU country, Germany. The variety of models used appears to be greatest in the UK, and so does the practice of modifying them project by project. Harmonization is the process of removing the physical, technical and fiscal barriers by adjusting the community law, taxes, markets and procedures of the member states to conform to agreed Community standards. It is estimated that harmonization should produce a 5±6% increase in internal trade, which would be worth about US$250 000 m. In the short time between the publication of the Act and the creation of the Single European Market, from 1986 to 1992, it was not possible to complete all the necessary arrangements. Therefore, the main objective of harmonization is not to remove all national diversity, except when the diversity is perceived to be a barrier to the four freedoms of the Single European Market. Engineering and technology projects are primarily affected by four key Directives, dealing with public works contracts, compliance, construction products and public supply contracts. However, the significant penetration of non-domestic markets requires the additional harmonization of the design techniques, insurance and liability, and professional qualifications. Ultimately, national design codes will be replaced by Eurocodes. EU legislation already in force is intended to regulate the selection of contractors for commercial and public projects. Whether the trend towards EU harmonisation will ultimately result in the standardisation of conditions of contract is at present uncertain, but it is clear that there will be distinct national differences in contractual practice and procedure for the foreseeable future.

18.6 Innovation
Promoters, the government and others in the UK have become increasingly interested and active in innovations in contract arrangements, probably motivated by recurrent experiences of the costs of poor quality, late completion and contractual disputes, and the uncertainties of predicting whether these will occur. Innovations have followed the privatisation of what were public services in the UK because of the change towards commercial rather than political accountability. The harmonisation of EU practice provides a vehicle for potential innovation which could be beneficial for project managers.


Engineering Project Management Experienced private and public promoters and many contractors have stated that simpler engineering and construction contracts should be used in the UK. Conditions of contract have tended to become longer and longer, and increased rather than decreased the promoters' potential risks, because the terms in them have become impractical and the documents too complex for project managers or others to comprehend how to apply them. Additions made for one project become a precedent for the next, and further additions made contract by contract increase contractors' liabilities contrary to agreed principles for allocating risks. The simpler contracts that seem to be sufficient in Japan and other countries are cited. The main argument has been that it would be more cost-efficient for promoters and contractors collectively to agree on what are the essential general terms, and end the practice of adding `supplementary conditions' for each project to meet what may be illusions about its special needs. Obtaining successful results also depends upon prior attention to relationships with contractors in order to anticipate problems that might lead to conflict. The basis of non-adversarial contracts is not new, but some promoters appear to be unfamiliar with them and the corporate attitudes they need in order to be successful. Therefore, it is the promoter who must decide on the priorities, allocate the risks, propose the terms of contract, select the contractor and manage the uncertainties. In order to utilise unfamiliar types of contract, a promoter usually requires additional managerial and contractual expertise. This requirement is often met by the appointment of an internal or external project manager. To be successful in using innovatory contracts, the project manager needs the authority to represent all interests in the promoter's organization.

Further reading
Male, S.P. and Stocks, R.K. (1991) Competitive Advantage in Europe, Butterworth±Heinemann, Oxford. Smith, N.J. and Wearne, S.H. (1993) Construction Contract Arrangements in EU Countries, European Construction Institute, TF003/4. Stammers, J.R. (1992) Civil Engineering in Europe, McGraw-Hill, Maidenhead.

Chapter 19

Project Management in Developing Countries

Engineering generally and the construction industry in developing countries are sufficiently different to warrant the inclusion of a chapter in a book on project management. The range of types and size of construction companies is different, the environment in which they operate is different, the resources that are employed may be different, and the way projects are funded is different. This chapter first reviews some of the main issues that contribute to the distinctive nature of developing countries and how these affect projects.

19.1 What makes developing countries different?
Engineering projects, and the construction industry, in developing countries are significantly different from those in the developed industrialised world. The main differences are related to climate, population and human resources, material resources, finance and economics, and socio-cultural factors. Due recognition of these differences is a prerequisite for the successful management of projects in developing countries. Climate Many poor developing countries experience quite different climatic conditions to those in the temperate north. The type of project that is required, the most appropriate technology to be applied, and the way in which the project is managed can be influenced by these variations in climatic conditions. For example, communities living in hot climates have quite different requirements for power and water, giving rise to alternative approaches to the planning and design of the requisite infrastructure facilities. Climate will also affect the design and type of technology used: solar power may be a realistic alternative to thermal



Engineering Project Management power generation, high temperatures and long hours of sunlight may indicate alternative forms of sewage treatment such as waste stabilisation ponds, and the design of buildings must be aimed at reducing glare from sunlight and ensuring that heat is kept out (rather than in). During construction, it may be necessary to take precautions which are not required in cooler climates, such as chilling or adding crushed ice to the water used in mixing concrete, and paying particular attention to the curing of concrete. Planning and scheduling of construction work can also be affected by the climate ± particularly when constructing roads, bridges and hydraulic structures in areas affected by heavy seasonal monsoons. The project manager therefore needs to be fully aware of the climatic implications from the very earliest stages of the project.

Population and human resources Of the six billion people currently living on this planet, less than one billion live in what the World Bank categorises as high-income countries, whilst some 3.5 billion live in low-income countries (over two billion of these in China and India). Nearly half of the world's population have an income of less than US$2 per day, and 1.2 billion must survive on less than US$1 per day. Up to 25% of children born in many low-income countries do not reach the age of five, and the average life expectancy in the poorest countries is less than 40 years. Over a billion people do not have access to a safe water supply, a third of the world's population have inadequate sanitation facilities, and nearly five million deaths per year in developing countries are directly attributable to water-borne diseases and polluted air. In addition to this lack of basic water and sanitation facilities, many live in sub-standard housing, transportation and communication links are poor or non-existent, and fuel for heating and cooking is in short supply. The problem is compounded by exponential population growth and rapid migration from rural to urban areas worldwide. It is estimated that the world population will rise to 8.5 billion by 2025, of which over 7 billion will be in developing countries. By 2050, the total world population could increase to as much as 10 billion. In the past, much of the developing world's population has been in rural areas, but this is now changing rapidly, and population in urban areas is growing much faster than in the rural areas. In 1994, about one billion people in the developing world lived in towns and cities; it is estimated that by 2025, this will have risen to around 4 billion. These facts and figures point to a huge need for infrastructure development throughout the developing world ± a need that can only be

Project Management in Developing Countries


fulfilled through the implementation of well-managed engineering projects. Population and human resources not only affect the need for projects, but also the way projects are implemented. The large pool of available and relatively cheap labour, much of which is unemployed or underemployed, points to a less mechanised approach to construction and a greater use of human labour. Labour-intensive construction requires a different approach to the planning, design and management of projects, and these issues must be addressed at the earliest stages of the project. Although the labour force in developing countries may be plentiful, it is also likely to be relatively unskilled. The questions of training and technology transfer therefore need to be taken into consideration throughout the planning and implementation of the project. Materials, equipment and plant Many of the materials commonly used in construction projects are often not readily available in developing countries. Cement and steel may have to be imported and paid for with scarce foreign exchange. Delays in importation and difficulties in gaining passage for imported goods through customs are not uncommon and need to be allowed for. Even if materials are manufactured in the country of the project, supplies cannot always be guaranteed and the quality may be inferior to that normally expected in industrialised countries. Production capacity and quality should therefore be assessed before the detailed design is done. In some cases, it may be necessary to consider alternative materials such as stabilised soil, ferrocement, round-pole timber, or pozzolana as a cement replacement. Many such alternatives are traditional indigenous building materials and may be more acceptable than steel or concrete. An assessment of what is available and appropriate needs to be made at an early stage and used in the design. Imported mechanical equipment, whether it be for construction or for incorporation within the completed project, is expensive and requires maintenance. Trained maintenance technicians and a reliable supply of spare parts are the absolute minimum requirements if the equipment is to continue to function over its anticipated life. There is generally a shortage of reliable and operable construction plant in developing countries, and it is often not possible to hire plant because plant hire companies do not exist. Managers of projects, particularly large ones, will have to import plant for the project, and then decide on whether to sell it or transport it back to the home country on completion of the project.


Engineering Project Management

Finance and economics Although there is a great need for new projects in developing countries, there is also a lack of funds from the normal sources expected in the developed countries. Many projects are funded externally from national aid agencies, international development banks, or non-governmental organisations (NGOs) such as international charities. Project managers involved in the identification, preparation and appraisal stages of a funded project need to be fully aware of the requirements of the grant- or loan-awarding agency to whom they are making application for funding, as each has its own specific requirements. Socio-cultural factors The successful management of a project in a developing country requires an understanding of the ways in which society is organised, and the indigenous cultural and religious traditions. In Muslim countries, time must be allowed for workers to participate in daily prayers, and during the month of Ramadan fasting is mandatory during daylight hours, thus affecting productivity and the way work is organised. The respective roles of men, women, religious and community leaders, and land owners must be understood, particularly when managing projects in which the community is actively participating. If socio-cultural factors are not taken into consideration, a project may not be successful even if it is successfully constructed. A new water supply may not be used if the community feel they do not own it, or if traditional existing sources of water have a strong cultural significance; sanitation facilities might be under-used or neglected if the orientation offends religious beliefs, or if men's and women's toilet blocks are sited too close together. As with other factors already mentioned, a knowledge of socio-cultural influences is therefore necessary at the earliest stages of a project because they may have a significant effect on project identification, appraisal and design, as well as construction and operation. Working with other professionals Project managers often have to work with a variety of professionals, e.g. electrical and mechanical engineers, chemical engineers, heating and ventilating engineers, environmental scientists, architects, quantity surveyors and planners, but nowhere is the diversity of professionals so great as when the project is located in a developing country. In addition to the list given above, the project manager working in a developing

Project Management in Developing Countries


country may well have to work closely with agricultural scientists, health and community workers, educationalists and professional trainers, economists, community leaders, sociologists, ecologists, epidemiologists, local and national politicians, and perhaps many others. Good written and oral communication skills and an ability to understand the views and perspectives of other professions are valuable qualities in any project manager, but they could be vital when the project is set in a developing country.

19.2 The construction industry in developing countries
Unlike the developed countries, many developing countries do not have a mature construction industry consisting of well-established contracting and consulting companies. Much, if not most, of the building and construction is done by the informal sector. This consists of individual builders and tradesmen, who are mainly concerned with building family shelters, and community and self-help groups, who may construct small irrigation works, community buildings, grain storage facilities, water wells and the like. These individuals and small groups rarely attract funding, and the works are completed using labour-intensive methods and locally available materials. Small community groups may gain the attention of national and international non-governmental organisations, who are more inclined to fund and work with such groups than are formal aid agencies and development banks. The formal sector consists of public or state-owned organisations and private domestic contractors. The proportion of work carried out by the public sector is usually much higher in the less developed countries than it is in the richer countries, but low salaries, lack of incentives and poor promotion prospects often result in highly demotivated professional and technical personnel. Contracting is a risky business in any country, but in many poor developing countries the lack of access to financing, excessively complex contract documents, failure to ensure fair procurement practices, the high cost of importing equipment, and the fluctuations of demand for construction often mean that the private sector of the construction industry has not had the opportunity to establish itself sufficiently to bid for major infrastructure projects. These are almost entirely carried out by international contractors, and funded by national and international loans and grants. In some countries, up to 80% of major building and civil engineering is executed in this way. Because of the importance of the construction industry to the


Engineering Project Management development of the overall economy, the growth of an indigenous construction industry needs to be encouraged. In an attempt to do this, the World Bank and other agencies have encouraged the `slicing' and `packaging' of contracts, i.e. breaking up large contracts into smaller ones that local contractors would have the resources and capability to bid for. Other initiatives have included a greater use of labour-intensive construction, help with finance for smaller construction companies, the encouragement of plant hire companies, and management training for the principals and staff of construction companies. Technology transfer and training, particularly management training, play an important role in this development.

19.3 Finance and funding
Developing countries are, by definition, poor. Funding for projects will therefore be scarce, loan finance difficult to obtain, and resources scarce. In many cases the only source of finance will be from development banks, aid agencies or charitable non-governmental agencies, many of whom obtain at least part of their funding from national aid agencies. The major development banks include the World Bank, the Asian Development Bank (ADB), the African Development Bank (AfDB) and the European Bank for Reconstruction and Development (EBRD). These are all multi-lateral funding agencies, drawing their funds from several different countries. They operate as commercial banks, loaning money at agreed rates of interest. The loans have to be repaid, albeit the loan conditions are often more favourable than those obtained from commercial banks, and they may allow a period of grace before repayments commence. Most industrialised countries have their own government bi-lateral aid agencies, such as the UK's Department for International Development (DfID). These agencies fund projects in developing countries through loans and grants, and also direct some of their allocated funds to those development banks of which they are members. Aid awarded directly by these agencies is often `tied', i.e. the grant or loan is conditional upon some of the goods and services needed for the project being procured from the donor country. Loan finance for construction companies to expand, buy equipment, or simply to maintain adequate balances and ease cash flow difficulties is extremely difficult to obtain from commercial banks in developing countries. Contractors may therefore be forced to borrow from other sources at inflated rates of interest. However, some countries have

whilst that of the industrialised world was a £1000 technology. who defined it in terms of the equipment cost per workplace. and that any budding entrepreneur could save sufficient money over a 10±15 year period to purchase the equipment necessary to start a small business. which act as intermediaries to channel funding from external agencies such as the World Bank to the construction industry and other developers. concrete can be mixed slowly and inefficiently by hand. and help develop and improve the economy. It should also be maintainable using local resources. However.4 Appropriate technology The distinctive nature of the construction industry in developing countries suggests alternative approaches to the design. In the context of construction technology. Shumacher (1973). The concept of intermediate technology was first developed by E. He suggested that the traditional indigenous technology of the Third World could be represented as a £1 technology. Many would argue that all technology should be appropriate. compared with a modern tractor and plough as the £1000 technology. if the budding entrepreneur is a resident of a developing country. An example from the agricultural sector is the traditional hand or garden hoe as a £1 technology. it would take them over 100 years to purchase equipment of the advanced £1000 technology type. and it should be affordable. Alternatively. but which would improve efficiency. and this is clearly impossible. The application of appropriate technology is one approach that has been promoted as a way to overcome some of the problems associated with the implementation and long-term sustainability of development projects in the Third World. construction and management of projects. 19. using a flat wooden board and a shovel (£1 technology). Appropriate technology should be able to satisfy the requirements for fitness for purpose in the particular environment in which it is to be used. The labour-intensive . reduce drudgery. and perhaps therefore it is intermediate technology that we should be focusing our attention upon. where salaries are a fraction of those in the industrialised world. a mechanised concrete batching and mixing plant can be used (£1000 technology). He pointed out that throughout the world. the equipment cost of a workplace was approximately equal to the average annual income. Schumacher therefore advocated an intermediate technology ± a £100 technology (the animal-drawn plough) ± which would be affordable to people in the Third World.F.Project Management in Developing Countries 347 development finance companies.

cement and water are placed in the box. simple to maintain and repair. mounted on simple wooden wheels. and fitted with a handle. There are critics of the use of intermediate technology. An intermediate technology concrete mixer. the water and wastewater treatment plants which are not functioning because of lack of funds for . Malaysia and Taiwan as examples. requires no source of power apart from human labour.1 Intermediate technology concrete mixer. Sand.348 Engineering Project Management method is very slow and the quality of the concrete is likely to be inferior. the Third World will never catch up with the industrialised world. or lack of maintenance staff or spare parts. the lid is fastened and the device is then simply pushed around the site until the concrete is mixed. and produces quite good quality concrete ± laboratory tests indicated cube strengths of approximately 90% of those obtained from a mechanical mixer. developed in Ghana. who point to the rapidly expanding economies of Korea.1. Supplies of electrical power or fuel for the mixer may also be unreliable. is illustrated in Figure 19. including many from developing countries themselves. aggregate. The device is cheap. there are numerous examples illustrating the unsustainability of advanced technology ± the factories operating at a fraction of their design capacity because of inadequate distribution networks. The mechanical mixer is not only expensive. On the other hand. and argue that without access to the most advanced technology available. but it may be difficult to maintain owing to the lack of local skilled mechanics and the difficulty and cost of obtaining spare parts. It consists of a box lined with thin galvanised metal and fitted with a hinged top. Hinge Catch Figure 19.

became less familiar with labour-based methods. social.Project Management in Developing Countries 349 consumables and spare parts. In addition to this were the many problems associated with the welfare of large numbers of labourers. aqueducts. cost and sustainability. and more labour. labour-based construction actually generates employment and produces an income for those engaged on the project. Much of the infrastructure. something that few Third World countries can afford. engineers and project managers. The project manager must decide on what is or is not appropriate in any given context. particularly bilateral tied aid. partly because the small and isolated infrastructure projects required for these rural areas were not attractive to either funding agencies or large equipment-based contractors. maintainability. Research into the potential for labour-based construction revealed that there was a reluctance to adopt such methods because it was felt that the costs could not be predicted accurately. by funding agencies expecting or requiring trade and business as a condition for loans and grants. In contrast. in industrialised countries was built by our ancestors using labour-based methods. However. This situation was encouraged in many developing countries through the provision of aid. railways. They need to address the questions of fitness of purpose. the reliance on plant-intensive construction has a number of drawbacks for developing countries. the main one being the high expenditure of foreign exchange. . `intermediate' or `advanced' technology is the most appropriate will depend on the physical. Training for civil engineers has become based on equipment-intensive methods. 19. sewers. and it would be more expensive and more prone to delays than equipment-based construction. canals. With the change to machine-based construction. cultural and economic environment of the particular developing country in which the project is set. and the impassable sealed roads which have not been resurfaced owing to the lack of suitable plant or materials. e. This is termed labour-based or labourintensive construction. and this has become the norm throughout most of the world.5 Labour-intensive construction One facet of appropriate construction technology is the use of less plant and equipment. in both industrialised and developing countries.g. Whether `local indigenous'. In the 1970s it became clear that the plight of the world's rural poor was not improving. the labour force was unreliable. and it is only fairly recently that extensive use has been made of heavy machinery for construction and building.

Most labour-based construction projects will in fact use a combination of various forms of motive power ± human. and even shorter haulage distances might be most suited to labourers with wheelbarrows or headbaskets. whereby the economic benefits of enhanced employment and the potential for growth and development are included as benefits of the project. whilst others are better carried out by labour-based methods. Long-distance haulage is probably best done by truck. For an even more comprehensive comparison. if labour-based methods are to be given an unprejudiced assessment. good communications between the various sites and good planning and coordination are essential. This is sometimes referred to as design equivalence. The implicit choice of equipment-based construction methods has an influence on the planning and design of the works. In many construction operations. a full economic appraisal should be carried out. Therefore. although a concrete pipe culvert might be installed using machines. and ensuring that materials and tools are always available and in good condition. dispersed and remote sites. Finally. for example. animals are better and cheaper for shorter distances over steep or rough terrain. For example.350 Engineering Project Management It has now been demonstrated that. brick arch culverts can only be constructed using labour. Good management of labour-based construction entails ensuring that the morale and motivation of workers remains high at all times by offering incentive payments. excavation and quarrying are all well suited to labour-based methods. and it would be totally impractical to consider labour-based methods for this form of construction. Balancing these resources to ensure full productivity is one of the tasks of the manager. alternative designs suited to labour-based construction should be considered. This can be made possible with good management. providing good training. Some activities are always more suited to machine-based construction. and a fair comparison between the financial costs of labour-based and equipment-based methods may be difficult once the design is finalised. Earthworks. The key to efficient construction is selecting the optimum combination for a particular project. Because labour-based construction projects can often entail work being carried out at a number of small. labourintensive methods can compete with plant-based methods in terms of both technical quality and cost. An asphalt road surface requires equipment. in certain circumstances. animal and machine. attending to the welfare of the workers. it is important to note that the availability of labour in rural . a mix of labour and machine will provide the optimum solution ± earthworks may use labour for excavation and a truck for haulage.

The reported advantages are that it will help to ensure that the project is used. sanitation and irrigation schemes. be successfully operated and maintained. The participation of the community for whom the project was intended was initially employed to provide assistance with the construction of rural projects. and it can delay the start and completion of a project. although this may have the disadvantage of workers refusing to return to normal rates of pay later. In some cases. and it is even less conceivable that they would participate in their construction or operation. they know what they want. there is a need to collect data on the availability of labour prior to making the decision on whether or not to adopt a labour-intensive approach to the project. It may be necessary to raise project wages at these times in order to ensure continuity of work. if not essential. for success. such as the development of water. planning and even design of projects. cultural and religious factors which may affect the design. particularly small projects in rural areas.Project Management in Developing Countries 351 agricultural areas can vary considerably with the seasons: during planting and harvesting time. the general public may be involved in the sanction and approval stage of projects through public enquiries or public protest. and community training and education may be necessary. the argument being that the community have a much better local knowledge. The idea has since been developed further to encompass the identification. and that it can. and this will entail providing suitable accommodation. In any case. In some cases. For project managers this can entail a great deal of additional work. but they are unlikely to be involved in the planning and design of projects. For projects in developing countries. full employment and higher wages can be obtained on the farms. and of course they are aware of all the social. which must be provided with water. sanitation and other essential services. the concept of `community' or `beneficiary' participation is now accepted as being expedient. it may be necessary to employ migrant workers from another area. The construction . and will. It may also have the added drawback to the community of decreased agricultural output. normally in camps.6 Community participation In industrialised countries. rural communities may not be aware of the advantages of a project. This was primarily to reduce costs and ensure that the local community would have sufficient expertise to enable them to operate and maintain the schemes once they had been constructed. 19. such as the improvement of water quality.

This all places an extra burden on the project manager. Direct purchase of equipment involves the least amount of risk on the part of the vendor and the greatest risk for the purchaser. entering into a joint venture. processes and machinery will be acquired from their actual use than from merely observing or learning about their use. However. Joint ventures between an established contractor in an industrialised country and a contractor in a developing country can be a very effective .7 Technology transfer The Third World needs new construction technologies and management expertise in order to develop. and may possibly even be detrimental to the achievement of longterm goals. but only if those technologies and techniques are appropriate. This can be achieved through direct purchase of equipment. 19. or entering into some other form of contractual arrangement with an experienced company or organisation in the developed world. provided that good training. this can be a quick and effective method of transferring some technologies. if there is a real commitment to the ideal of technology transfer in terms of the acquisition of knowledge. established channels for the supply of spare parts. Becoming a licensee may be seen as purchasing intellectual knowledge in addition to purchasing or leasing equipment. Effective technology transfer is more than just education and training. skills and equipment. However. a much greater understanding of techniques. reliable after-sales support. Hence some of the risk of such a venture will be taken by the licensor.352 Engineering Project Management of pilot schemes can be necessary in order to convince villagers of the benefits to be derived from a project and to obtain their views on the design and possible improvements. The long-term benefits acquired when new technology is introduced and used for one short contract will be negligible. It is usually in the interests of the licensor to provide a higher level of support than might be expected from a vendor because the terms of the licence would normally entail the payment of a percentage of the value of the work carried out. and sound warranties are included in the package. and highlights the importance of communication skills and the ability to work with a variety of different people and organisations. Although training is essential. becoming a licensee or franchisee for an established process. Even more control and mastery will be obtained by owning and being responsible for them. the benefits may be considerable.

it would appear to be more widespread in developing countries. obtaining planning permissions and building consents. Corruption can affect a project at a number of stages in the project cycle. The developed country partner may invest either cash and/or premises. issuing payment certificates. such as the marketing of construction services. The investment from the developed country partner is in the form of either cash or equipment. In such cases there is often little or no commitment on either side. and the local company allowing their foreign partner to make the decisions while they take a back seat ± and their share of the profits! Joint ventures set up for short one-off projects are likely to be a less effective means of technology transfer than long-term ventures. together with technical and management expertise. but more mature and experienced. Twinning is a formal professional relationship between an organisation in a developing country and a similar. labour and locally available equipment. Very often. getting materials and equipment through customs. Joint ventures will only be an effective way of transferring technology if both parties are firmly committed to the idea. pre-qualification. which can be provided through an arrangement known as twinning. and making . tender evaluation and award. construction supervision and quality control. and most funding agencies allow for training within the loans or grants awarded for projects.8 Corruption Although corruption does occur in industrialised countries. Agencies also provide finance specifically for training and technical assistance. Unlike training programmes. joint ventures are formed merely to satisfy a local requirement for overseas contractors to enter into a joint venture with a local company in order to bid for work in that country. organisation in another country. and any project manager working in such areas needs to be aware of the problems and of their own professional codes of conduct and ethics. all of which require some investment from both the partner in the developed country and the one in the developing country. these are often long-term arrangements and may involve lengthy visits from key personnel in both organisations to their counterparts in the twinned institution. the overseas company being involved out of necessity. There are a variety of different forms of joint venture.Project Management in Developing Countries 353 way to transfer technology and encourage the development of the indigenous construction company. Contractors working in developing countries can help the process by providing training to local staff and sub-contractors. 19.

It takes two parties to make bribery effective ± the party that requests the payment and the party that provides the payment. Until fairly recently a blind eye was turned to this problem. Organisation for Economic Cooperation and Development (OECD). cooperate fully with any legitimately constituted investigative body . The World Bank points out that apart from money finding its way into the bank accounts of corrupt individuals and thus making less available for other development projects. bribery often means that the wrong projects are implemented. and modified their code of ethics (FIDIC. leaving a graveyard of white-elephant infrastructure facilities that may never be used to their full potential. or (b) seeks to affect the consulting engineer's impartial judgement. and some economists and business people argued that such practices actually stimulated economies by allowing more wealth to enter and be distributed throughout the country. It is not unusual to read of buildings and other structures collapsing as a consequence of poor-quality construction and building-code infringements which have been traced to bribery and corruption. FIDIC is quite clear on the issue. It has not been unusual for international construction companies to employ local `agents' in order to facilitate business dealings in a foreign country. United Nations and the International Federation of Consulting Engineers (FIDIC) have all taken a firm stand on the issue. thus saving costs in the long term. The World Bank has suggested that an average of around 10% of contract costs are siphoned off in bribes and other illicit payments.354 Engineering Project Management decisions on claims and completion. The consulting engineer shall: o o neither offer nor accept remuneration of any kind which in perception or in effect either (a) seeks to influence the process of selection or compensation of consulting engineers and/or their clients. 1996) by adding the following text. Such agents may have a perfectly legitimate function. but payments or commissions to agents can also be an effective way of concealing illicit payments to corrupt officials in order to secure a contract or to facilitate completion of the work. international companies have been as culpable as indigenous government officials in some cases. It was further argued that bribes could cut through overly bureaucratic red tape and allow construction projects to meet important deadlines. with up to 80% being lost in this way in extreme cases. In this regard. These arguments have since been thoroughly discredited. and major international institutions such as the World Bank.

However. 19. all of whom require the basic necessities of food. terminating contracts or taking other disciplinary action against any individual or firm that is found to be involved in corrupt practices. S. Co à te Department for International Development. . shelter. difficulties. Reference Schumacher. 4th Quarter. Without project managers who can effectively manage engineering projects. (1973) Small is Beautiful: Economics as if People Mattered.9 Summary The world's population is still growing at an alarming rate. as well as direct cash payments. it is barely keeping pace with the ever-expanding population. this need will never be met. London. successful projects in developing countries require managers who recognise the needs and are knowledgeable of the clear and distinctive differences. peculiarities and rewards of managing projects in these countries. and further details of their work can be found at the web site listed below. In 1993. Blond and Briggs. (1984) The Twinning of Institutions ± Its Use as a Technical Assistance Delivery System. In their policy statement on corruption. The world urban population is growing even faster. and once again it is in the developing world where the largest and fastest-growing cities are to be found. FIDIC make it clear that the term `bribe' includes indirect payments. Transparency International initiated a major crusade against corruption. Not only FIDIC. water and education.  -Freeman.F. Developments. but many other powerful international organisations are now prepared to act firmly by sanctioning their members. (1999) False Economies. using mechanisms such as scholarships. Although infrastructure development is taking place. Further reading Cooper. World Bank Technical Paper 23. and much of this growth is in the less developed world.Project Management in Developing Countries 355 which makes inquiry into the administration of any contract for services or construction. E. The need is overwhelming. L. currency exchange facilities and the actions of agents.

B. (1991) Mastering the Machine ± Poverty. http://www. World Bank (1994) World Development Report 1994 ± Infrastructure for Development.transparency. FIDIC (1996) Code of Ethics. http://www.org/about/ethics.356 Engineering Project Management Coukis. London.org/data/ World Resources Institute (1994) World Resources 1994±95. Oxford. World Bank.fidic.gov/democracy/ anticorruption/ World Bank (1984) The Construction Industry ± Issues and Strategies in Developing Countries. Oxford University Press. and Technology.org/ USAID. .asp Institution of Civil Engineers (1981) Appropriate Technology in Civil Engineering. World Bank. Anticorruption Web Site. Smillie. London. Oxford. I. Oxford University Press. Oxford. Oxford. http://www. Transparency International. http://www.worldbank. Oxford University Press. Intermediate Technology Publications. Thomas Telford.usaid. Oxford University Press. World Bank (1992) World Development Report 1992 ± Development and the Environment. and World Bank staff (1983) Labor-Based Construction Programs. Aid. Data and Maps.

placing duties and obligations onto the project manager. In the last few years.Chapter 20 The Future for Engineering Project Management The discipline of project management continues to evolve over time. the International Project Management Association's agreed certification criteria for qualified project managers. manuals of good practice and minimum qualification standards. The essential function of the project manager remains unchanged. To fulfil these requirements new skills and knowledge are necessary. Industry is also moving towards a more collaborative form of procurement and implementation. from discrete operations to managing by projects. The project manager should be appointed early in the process. Notable amongst these are BS6079 and the Association for Project Management's body of knowledge and the Project Management Institute's (revised) body of knowledge. new opportunities such as the private finance initiative. from construction to IT. partnering and alliancing have been adopted. and should pay due attention to the role of the parties in a project and the basic guidelines. The recognition of project management as a profession has spread across all business sectors. ideally with overall control from inception through to operation or decommissioning. and standard contracts for the engagement of a project manager in the US. from time based to performance and quality based. the changes in project management have been reflected in increased documentation. 357 . consortia and management contracts. and it is this information which accounts for much of the new material in this edition. In addition to the established use of joint ventures.

the advantage to be gained. The project manager The role of the project manager is to control the evolution and execution of the project on behalf of the promoter. The project manager must ensure that the promoter organisation supports the project team with direction.1 The role of the parties The promoter The ultimate responsibility for the management of a project lies squarely with the promoter.358 Engineering Project Management 20. so that the current situation in the design office. This role will require a degree of executive authority in order to coordinate activities effectively and take responsibility for progress. on the supply of materials. Ideally. If the project manager is to fulfil the task of control of the realisation of the project on behalf of the promoter. If this is done. . This is not to say that the promoter must be involved in the detailed project management. and that it regularly reviews both objectives and performance. from early access to the site may be equated with any additional costs in full knowledge of the value of early or timely completion. but it does mean that the machinery must be in place for the promoter to make critical decisions affecting the investment promptly whenever necessary. The project manager must therefore drive the project forward and think ahead. decisions taken on engineering matters cannot be divorced from all other factors affecting the investment. The continual updating of a simple `time and money' model of the project originally compiled for appraisal will greatly facilitate effective control during the engineering phase of the project. decision and drive. say. and consequently any project organisation structure should ensure that this ultimate responsibility can be effected. the project manager should be involved in the determination of the project objectives and subsequently in the evaluation of the contract strategy. delegate routine functions and concentrate on problem areas. It will be necessary to define the extent of such delegated authority. Control may only be achieved by regular reappraisal of the project as a whole. and on site may be related to the latest market predictions. on fabrication. and the means by which instructions will be received with regard to those decisions which the project manager is empowered to make.

The overriding conclusion drawn from research is that promoters and all parties involved in projects and contracts benefit greatly from a reduction in uncertainty prior to their financial commitment. must be ultimately responsible. The project's objectives should also be communicated to the other parties involved in project implementation.The Future for Engineering Project Management 359 20. The likelihood of a successful project is greatly improved when all key managers of design. For the promoter. Engineering projects are normally of short duration and are completed against a demanding time scale. The appraisal must be realistic and identify all risks. construction and supporting groups are fully informed and committed to these objectives. The dominant considerations must be fitness for purpose of the completed project. The fact that the promoter usually does not see any return on his investment until the project is commissioned suggests that timely completion should be a priority. the project manager. It is essential that project management ensures that the promoter clearly defines the project objectives. Adequate staff of the right quality must therefore be appointed and given training in the appropriate techniques and procedures. for the realisation of the project. Single-figure estimates are misleading. uncertainties. The promoter commits to investment in the project on the basis of the appraisal completed prior to sanction. time and quality. Money spent early buys more than money spent late. and be known to be responsible. the normal primary objectives are concerned with cost. potential problem areas and opportunities.2 Guidelines for project management The project management process is summarised briefly below. Thereafter. and by all parties prior to the award of a contract. and should be supported by figures showing the range of the likely outcome of the investment. Willingness to invest in anticipating risk is a test of the promoter's wish for a successful project. and safety during both the implementation and the operation phases. These are interrelated and may conflict. All staff concerned must be familiar with the contractual procedures employed. together with the ranking of their relative importance. one person. (2) (3) (4) . (1) The success of a project or contract depends on the management effort expended by the promoter prior to sanction.

the contractor's programme should be flexible and subject to constant review by the project manager.360 Engineering Project Management (5) Although the scope of the project will be agreed at sanction. If the conceptual design is rigorously reviewed. adherence to the programmed time schedule for the work will also control both cost and investment. the project manager must take a broad view of the project and aim to coordinate design. implementation. time-related or quantity proportional charges. Management effort should be concentrated on the present and the future. The interaction of external factors such as contractors. Owing to the likelihood of change. It is therefore convenient to develop the plan as a time-and-money model of the project which will react realistically to changes in timing. time devoted to the reporting and collection of historical data should be kept to a minimum. In planning. and subsequent operation and maintenance. commissioning. sufficient time must be allowed for mobilisation by each contractor. Particular attention should be given at this stage to the subsequent operation and maintenance of the project. Regular review or project audit of both objectives and achievement should be linked with up-dating the project plan. statutory requirements and public relations must all be considered. particular attention must therefore be given to the start-up of the project. and on the problems which will hinder the achievement of the project (6) (7) (8) (9) . Consideration of alternative contract strategies will frequently focus attention on any deficiency of information. Time-related costs are significant in all types of construction work and predominate in many civil engineering projects. will follow early in the engineering phase. Time lost at the beginning of a project can rarely be recovered. Effective control of the project will only be achieved through continual planning and replanning. A contractor will plan in detail and aim to achieve continuous and efficient deployment of resources. A strategic project plan should clearly show the financial consequences of alternative courses of action and of indecision. content and cost of work. access. This realism is largely dependent on the correct definition and allocation of costs and revenues as either fixed. this provides an opportunity both for cost saving and for ensuring that the proposals meet the promoter's objectives. Similarly. it is probable that the conceptual design. which will determine the final layout and size of the functional units. Therefore. method.

Selection of an appropriate contract strategy at an early stage of project implementation is perhaps the most important single activity of the project management team. the more likely it is that they are working to a tight. and should be fully aware of both the promoter's objectives and the contractual responsibilities. Prior definition and agreement of acceptable standards is essential. Involvement in prolonged bargaining over claims is a sign of failure. rather than by variations in the original contract. Quality assurance systems can assist in the setting and achieve- . The project manager should rigorously assess the cost and benefit of all design changes before they are implemented. Priority should be given to timely completion of the project. Again. Selective tendering followed by rigorous bid appraisal. The valuation should be based on prices. and all parties should be aware of tolerances. usually timely completion and economical cost. Parties are making their commitment at this point. Throughout the implementation period of the project. the promoter will inspect and approve the quality of workmanship of contractors and manufacturers. The appointment of a contractor on the sole criterion of lowest bid price will not necessarily lead to a harmonious contractual relationship. will do much to ensure that the contractor has not misjudged the job and that the price is realistic. The desired quality of workmanship must always be considered in relation to the promoter's other prime objectives. well-resourced programme. the achievement of which may prove difficult and/or expensive. The better organised the contractor. Promoters frequently underestimate both the extent and consequence of change. an adequate number of staff with relevant experience must be employed. There is a tendency for design engineers to specify unnecessarily high standards. The lowest tender may not ultimately produce the lowest contract price.The Future for Engineering Project Management 361 (10) (11) (12) (13) (14) objectives. Evaluate and agree payment for variations and claims as the job progresses. resource output and efficiencies similar to those incorporated in the contractor's tender. The disruptive effect of variation may therefore be serious. Modifications to manufacturing plant are sometimes best implemented during some future shut-down of the plant for maintenance. including a study of the contractor's programme and resource allocation. The production of an operational cost estimate will greatly aid the project manager in this appraisal.

their ability to persuade and lead. can be viewed in their own right. In the context of project management. Neither must the system inhibit the flexibility and judgement required for the management of the uncertainties associated with the project. Projects are managed by people who are continuously directing and communicating with other people. the quality of the performance of the project is greatly dependent on the quality of project staff.362 Engineering Project Management ment of project objectives. As time goes on. and become incorporated into best practice for the delivery of world-class project management. the system requires precision of communication and can be considered as its greatest value to project management. Properly practised. new methods and techniques are developed and promoted with varying degrees of success. This will demand effort. which will ensure that the project objectives are achieved. but prediction has to be attempted if progress is to be made. but has . Great attention must be paid to the selection and motivation of staff. The provision and training of an adequate management team is therefore an essential prerequisite for a successful job. Prediction is based on an analysis of the existing situation and the related historic trends which are used as a mechanism to project into the future. It is likely that further novel and innovative processes will be derived. This technique may be acceptable for many purely technological processes and for short-term predictions. Some of these processes. for example total quality management and business process re-engineering. Care must be taken to ensure that the adoption of a quality assurance system does not result in rigid adherence to unnecessarily demanding specifications. and it will require the dedication and motivation of people.3 Project management ± the way ahead It is always difficult to prejudge the evolution and development of existing systems. The further into the future the target. but in context can also be viewed as part of the overall process of project management. particularly in the more subjective management area. for it is their drive and judgement. it will not happen as a matter of course. Project management relies upon good management practice. Personality and an ability to think ahead are as important as technical know-how. (15) Management is concerned with the setting and achievement of realistic objectives for the project. 20. the less can be seen. but it is limited in its ability to encompass the wider picture.

and any other project constraints. The most successful users of these individual techniques are organisations not currently using project management for their internal and external projects. subsume these nonproject management approaches. over the next few years. . the first time and every time. there is likely to be a need for project management for the foreseeable future.The Future for Engineering Project Management 363 the overall goal of the project's completion in terms of the project objectives as its prime objective. and often from a manufacturing or production background. Judging by current performance. but will result in improved project management procedures integrating discrete business functions to enhance the effectiveness of decision making. Project management will be required until such time as all projects can be delivered to meet all the promoter's requirements. Therefore. This is likely to involve some changes in approach and terminology. The techniques mentioned above are also aimed at making improvements in management practice and hence increasing the effectiveness of projects. it is likely that project management will. but they achieve this aim by concentrating on non-project parameters.

The concrete frame for the five-storey block is assumed to have 16 men. despite having blocks A and B as a priority. The project includes four blocks of low-rise flats. familiar to many urban or suburban sites. rising to a plateau of 24 bricklayers for 20 weeks before falling back to 12 again. There is no single correct solution. Therefore. The model solution suggested is shown in Figure S1. and has a maximum number of 364 . Assumptions made include having two excavation teams of 8 men: the first team commences on block A and then goes to the five-storey block. it would not be possible to finish within the time allowed.1 New housing estate The project consists of a small development of a new housing estate. It is further assumed that brickwork could overlap the frame by 14 weeks and that finishing could overlap brickwork by 15 weeks. as the precise answer depends upon the assumptions made. The logic is shown by dotted lines. as soon as the drain has been diverted work must start on the five-storey block. and important constraints or key dates are clearly marked. This results in a base demand for 12 bricklayers on site. allowing 4 weeks float to compensate for an optimistic programme. a block of five-storey flats and a shops and maisonettes complex. A histogram of the demand for bricklayers and for total labour has been plotted directly under the bars at the bottom edge of the programme. In this case the five-storey block absorbs the majority of the site man-hours. the second team commences on block B and then also to the fivestorey block. the brickwork 12 men and the finishers 20 men. The key issue is to identify where most of the work is required.Suggested Answers to Exercises in Chapter 9 9. This solution completes in 78 weeks. and unless careful assumptions are made regarding the gang sizes and the overlapping of the different stages of construction. with support services. The space within the bars has been used for figures of output.

Suggested Answers to Exercises in Chapter 9 Figure S1 New housing estate: suggested solution 365 .

.366 Suggested Answers to Exercises in Chapter 9 Figure S1 (Contd).

falling from 300 m/week/gang in normal ground to 75 m/ week/gang in rock. water services and landscaping that will have to be completed by week 34 also. shown as Figure S2. to balance the needs for bridging with the productivity of the gangs. shows a possible solution for one bridging gang. Pipes are available at a maximum rate of 1000 m/week.Suggested Answers to Exercises in Chapter 9 367 people on site of 65. Keeping the total on site low is important in practice. Remembering the constraint to keep at least one week ahead of the pipelayers. where the performance of individual activities will be greatly affected by their location and the various physical conditions encountered. a sequence for offloading from suppliers' lorries. storing and stringing out is shown on a weekly basis. 9. gang 3 at 12 km and gang 4 at 16 km. to the thrust bore at 13 km. The bridging gang move to keep ahead of each of the pipelaying gangs approaching an obstruction and hence move from the culvert at 2 km to the culvert at 18 km. as accommodation and equipment has to be provided for all workers. and computer-based methods are more efficient in resolving complex resources conflicts. In this exercise the assumption is that one stringing gang and four separate pipelaying gangs are to be employed. There is a conflict between smoothing the bricklayers and a smooth demand for total labour. The activities are represented by egg-shaped nodes and the interrelationships . paths. 9. The time-location diagram. The programme has to adopt a trial and error approach to producing the diagram.3 Industrial project (a) The precedence diagram for this exercise is shown in Figure S3. Pipelaying gang 1 starts at 0 km.2 Pipeline The time±location diagram is particularly suitable for cross-country jobs such as pipelaying. to the river crossing at 7 km. fences and screens. It is important to note that for A and B to be habitable then assumptions have to be made about the proportions of work for the drain connections. and finally to the railway crossing at 22 km. that there is a need for two gangs to tackle the rock between 10 km and 13 km. It can be seen from the slopes of the progress lines. one stringing gang and four pipelaying gangs. gang 2 at 9 km. With this solution flats A and B are ready by week 34. The remaining problem is to decide whether a single bridging gang can cope with all restrictions placed on the programme.

368 Suggested Answers to Exercises in Chapter 9 Figure S2 Pipeline contract: time±location diagram. .

All durations are expressed in months.Suggested Answers to Exercises in Chapter 9 Figure S3 Industrial project: Outline project network (precedence diagram). 369 .

a separate reduction in the duration of activity 14 would not reduce the project duration. This is one way of presenting the information. Total float. and fifth level. and B and D require investigation. fourth level. and therefore A and D would not be beneficial and can be ignored. Therefore options B and C are the recommended choice. but there are many other ways that might be particularly useful in a given situation. Take Activity 17 first and substitute B for A. The diagram is constructed and the forward and backward passes undertaken in exactly the same way as the worked example in the chapter. In Figure S3 each level or row of the diagram represents a particular responsibility: top level. . is 2 months. In this simple example the combinations of A and C represent the existing situation and A and D. although often some crossing is unavoidable. and hence would not be cost effective. The float associated with activity 16 is as follows. However. a gain of £44 000. Calculating the backward pass provides two critical paths: 1±2±3±6±9± 12±13±16±20±21 and 1±2±3±6±9±10±14±20±21. Recalculate the remainder of the forward pass to show an early finish of 71 months. as there are two paths. the minimum difference between the earliest finish time of that activity and the earliest start time of a succeeding activity. The extra cost of substituting B for A is £156 000 but the profit earned would be (75±71) 4 6 £50 000 = £200 000. project activities and design. electrical department. (b) The option to spend more money to save time is frequently encountered in practical project management.370 Suggested Answers to Exercises in Chapter 9 between activities by lines known as dependences. site investigation and civil (civil engineering). is 8 months. However. Minimum duration is 75 months and the critical path goes through activities 1±2±3±6±9±12±13± 16±20±21. free float. B and C. Therefore option B should be adopted for activity 17. mechanical department. When redrawing a critical path diagram try to minimize the crossing of logical dependences. the difference between its earliest and latest starts or finishes. Note: It is unlikely that you will get the most useful diagram at the first attempt. activity 14 is not on the critical path. main level. Activity 14 is now on one of the critical paths. second level. but more importantly think about the role of the plan in communicating to the project team. land purchase (legal department). option C should be retained.

the right pier pile driving. One of the optimal solutions gives completion in week 30 with two critical paths. abutment activities. and one the south. The question is slightly unfair. Nevertheless. and this would then link to all the excavation activities. If this is achieved. the overall effect on most networks is to reduce the completion time to 29 weeks with two different critical paths. No figure is included. Many people find the use of resourced bar charts of assistance. one going through the north. as there are a number of viable solutions.Suggested Answers to Exercises in Chapter 9 371 9. both going through activity 6. (c) The resources are heavily constrained. `Foundations' are followed by the next stage of the `Concrete' process. However. beams can be placed. any solution under 50 weeks represents a reasonable attempt at the exercise. and the planner has to use judgement to construct the network. no logic dependences are indicated. One Excavation team.4 Bridge (a) Taking a step closer to the real world. . a completion time for a `resource-constrained' project of 46 weeks can be achieved. The piledriving for the right pier should be inserted after `excavation' but before `foundations'. but it is recommended that the diagram should be kept as free and unconstrained as possible. Activity 18 `clear site' is suggested as the finish activity. Next. but there is no easy way. one concrete team for foundations. but remember in the logic that for a beam to be placed it must have the supports at both sides completed. It is suggested that `set up site' would be the start activity. as this type of resource scheduling is difficult to undertake without the assistance of a computer. (b) The effects of reducing the duration of pile driving to 5 weeks will vary depending upon the network drawn for part (a). In this case the obvious action is to employ resources away from the right pier such that the extra work required for the piledriving does not delay or disrupt the use of any resource. one concrete team for abutments and piers and one crane team severely limits the activities that can operate in parallel. There are a number of possible networks. All other `excavation' activities are followed by `foundations'.

91±2. 196. 3. 240 Associated General Contractors of America. 45. 35 factors affecting 90 changes and contract types 184±5. 196 Bolam's test 256 bottom-up design method 240 `branded product' concept 286 breach of contract 255 breakdown structures. 116. and total quality management 55±7 C-Spec 157 cash flow analysis 8. 33±7 VM review 26 appropriate technology 347±9 architect management role 304 training 245 arrow diagrams 139 compared with precedence diagrams 142 assembly breakdown structure (ABS) 243 assess±synthesise±evaluate model (of creativity) 239. 140 base-line study. for environmental impact assessment 61. 307 finance for 99 see also concession contracts building contracts 188. and software 148 Brent Spar oil platform 130 bribery 354±5 British Standards definition of project management 3 on environmental management 80±81 on quality assurance 45 budgeted cost of work performed (BCWP) 157 budgeted cost of work scheduled (BCWS) 157 build±own±operate (BOO) projects 307 build±operate/own±transfer (BOT) projects 308 build±own±operate±transfer (BOOT) projects 189. 120 appraisal stage 30. 66±7 bid conditioning 214±15 bill-of-quantities (BoQ) cost estimating method 108. 203 bureaucracy 222. 311. 323 check-lists for design brief 258±9 372 . on partnering 293 Association for Project Management (APM) 2. 31. 185±6 effects 361 Channel Tunnel project 87±8.Index Note: Figures and Tables are indicated by italic page numbers activity modeling. in cost estimates 122 alternative materials 343 appraisal costs 51 appraisal estimate 106. 223 business ethics 208 business process re-engineering (BPR). software for 148 activity-on-line networks see arrow diagrams activity-on-node networks see precedence diagrams actual cost of work performed (ACWP) 157 admeasurement contracts 196±7 allowances. 357 auditing of environmental impact 74 of quality 49 backward pass calculation (in network analysis) 144 ballpark estimates 113 bar charts 139.

360 corruption and bribery 353±5 cost 107 as project objective 10. of design work 253 . VM review during 26 communications 12 between project participants 247 in organisation 224 and stakeholders 134±5 community participation. in earned value analysis 166±7 cost control. 174±5 factors affecting 175±7. 315 market-led/contract-led 316 objectives 324 operational packages for 320 organisational structure 309±10 package structure 319±20 procurement of 311±13 projects suitable for 317 revenue packages for 320 risks associated with 316. 203 client see promoter collaborative relationships 228. 307±8 acronyms 308 advantages 321±2 classification 315±16 construction packages for 320 contractual structure 309. purpose 215±16 contractual concession agreement 311 control of projects 13. 179 cost analysis 102 cost±benefit analysis (CBA) in environmental economics 75±6 in project evaluation 35. 233±4 organisational structure in 233±4 commercial risks 39. 209. quantities/rates-based contracts. 339 in tender documents 217±18 contract documents 212±13 contract-led projects 316 contract management. 319 commissioning. 101±3. 310 Construction Industry Institute (CII). 317±19 speculative bids 312. 361 contracts analogies 178 factors affecting selection of 182±6 function of 193 for partnering 299±300 payment terms 194±201 and project organisation structure 186±93 see also concession contracts. price-based contracts. 197. selection of 179±80. target cost contracts contracts department. 313 comprehensive contracts for industrial projects 335 for offshore oil/gas projects 337 organisational structure for 187. in developing countries 351±2 competitive tendering 206. on partnering 293 construction stage. 196. factors affecting 177±9 contract planning 208±10 number of contracts 209±10 pre-contract stage 210 pre-tender stage 210 contract strategy 14. 315 373 concession periods 313±14 conditions of contract see contract conditions construction contract 281.Index for EIA information 69±70 civil engineering projects earned value analysis in 168±9 type of contract used 189. 310 definition 308 disadvantages 322 domestic/international projects 316 examples 323 and existing facilities 314±15 finance for 99 financial packages for 320 infrastructure/industrial projects 315±16 invited bids 312±13. 316. 360±61 contracting policy 207±8 business ethics 208 procedures 207±8 contractor-led procurement systems 277. 280 contractor pre-qualification 211 contractors. costreimbursable contracts. 37±8 cost codes. 188±9 concept stage design 241 VM review 23±4 concession agreements 311 concession contracts 189. cost estimate at 121 contingent-valuation method. for monetising environmental costs/benefits 79 contract conditions model/standard 201±4. 210. 281.

315. 346±7 labour-intensive construction in 343. in contracts 182. 312. relationship with project functions 161±2 earned value analysis (EVA) 157 application of 166±7 examples 167±72 reporting requirements 172 cost control cube 157. 184. 241±2 cost estimate at 106. 90±91. 313±14. 197±9 advantages 198 characteristics 182. 93±6. 310 debt financing contract 92±3 debt service ratio 93 decision-tree technique 146 decisions reasons for 13 representation in 12 decommissioning. compared with value management 21 cost-reimbursable contracts 176. 183. financing by 88. 158 cost estimating 105±26 at each project stage 106 historical data used 112±13 information technology used 123±4 for process plants 121±2 range of estimates 106 techniques 112±19 cost performance index (CPI) 159 cost planning 161±2 cost reduction. 250 dependency structure matrix (DSM) technique 250 . 185. 323 debentures 95 debt. 317 construction industry in 345±6 finance and funding 344. 186 disadvantages 198 for industrial projects 335 for offshore oil/gas projects 337±8 and target cost 199 tender review for 213±14 cost variance (CV) 158 costs included in estimate 114 quality-related 50±52 quantity-proportional 108 time-related 108 counselling 14 countertrade (goods exchange) 95. 183 dispute prevention/resolution 297 divisional organisations 226±7 documentation contract 212±13 quality system 49±50 tender 217±20 earned value.374 Index descriptive check-lists 69 design for assembly (DFA) 262±3 design brief 257±9 design equivalence. 319 Dartford Bridge/Crossing 98±9. for labour-intensive construction 35 design interface control 259±61 design liability 255±7 design management 238±63 role of 243±7 design for manufacturing (DFM) 261±2 design models 239±41 design stage(s) 6. 97 coverage ratio (for debts) 93 creativity 239 critical path analysis 144 culture. VM review during 27 delegation of authority 13 Deming circle 47 dependencies (in network diagrams) 142. 349±51 materials/equipment/plant availability 343 population growth 342±3 professionals in 344±5 project management in 341±56 socio-cultural factors 344 development banks 346 direct labour departments 192±3 discipline. effect on management 235±6 currency exchange risks 102. 121 resource profile for 251 design-and-supply contracts 188±9 designers and implementers 245±6 tribal behaviour 244 detailed design 242 VM review 26 developing countries appropriate technology in 347±9 climatic considerations 341±2 community participation in 351±2 concession contracts in 311.

124±5 estimating techniques 112±19 IT tools used 123±4 suitability for various project stages 119±21 EU countries. 120 design at 241±2 VM review 25 feasibility study 5±6. 293±4 emergency projects 12 empowerment of project team 2323 engineer±procure±construct (EPC) contract 192 engineer±procure±install±commission (EPIC) contract 192 Engineering and Construction Contract (ECC) 186. 67±8 environmental impact assessment (EIA) 60±62 base-line study 61. learning from 14 expert systems 124 external assurance quality costs 51±2 external projects. 91. 346 European Community/Union Directives/ regulations on environmental impact assessments 63±4 on procurement procedures 212. 65±6 screening 60. 96±7. 35 feedback 27 finance for overseas projects 97. 30. for monetising environmental costs/benefits 77 Egan Report 281. control of value of work done 164 estimates importance of early 109±11 realistic 3. 62 environmental impact statement (EIS) 60. 310. 100 financing of projects 86±104 appraisal of 98±9 fixed-price contracts 194±6. 326±8. 339 European Investment Bank (EIB) 97. 204 engineering supply chain system 287±9 implementation-and-assembly process 288±9 materials and products 289 professional services 288 environmental economics 75±80 cost±benefit analysis 75±6 valuation methods 76±80 environmental impact 58±60 auditing of 74 monitoring of 73±4 prediction of 61. legal system in 338±9 European Bank for Reconstruction and Development (EBRD) 97. 133 environmental legislation 63±4 environmental management 80±84 environmental management system (EMS) 80±84 checking and corrective action 84 implementation and operation methods 83±4 management review for 84 planning stage 82±3 policy stage 81±2 environmental quality index 71 environmental risks 39 environmental values 76 actual use value 76 existence value 76 option use value 76 equipment supply contracts 203 375 equity finance 87. organisational structure for 231±2 facilitator on international project 236 partnering workshops 298±9 factorial cost estimating techniques 112. 330 erection contracts. 346±7 sources 87±8 financial analysis 102 financial engineering 91±2 financial instruments 89±91 financial market analysis 102 financial risks 39.Index techniques 164±6 theory and development 159±61 effect-on-production methods. 67±8 legislation on 63±4 presenting EIA information 69±73 projects for which EIA is mandatory 63 projects for which EIA is recommended 63±4 scoping 60±61. 68±9 environmental interest/pressure groups 130. 335 float (in network analysis) 141±3 utilisation in resource levelling 145±6 forward pass calculation (in network analysis) 144 . 66±7 impact prediction 61. 41. 344. 115±16 failure costs 51 feasibility stage cost estimate at 106. 98 evaluation techniques 37±8 experience.

133 harmonisation (in EU) 339 head office work. 184.376 Index innovative broker 286 Institution of Civil Engineers (ICE) definition of value management 16 model conditions of contract 204 instructions to tendering contractors 217 insurance 103 integrated project team (IPT). for monetising environmental costs/benefits 78 hypertext organisation 228±9 implementation risks 39. 297 job plan 19 joint ventures. and supply chain 273. 315±16. 254±5 human-capital method. and supply chain 273. 40 implementation stage cost drivers 261 cost estimate 120 VM review 26 incentives and contracts 183. 249 soft gate 248. in developing countries 352±3 knowledgeable clients. 337 Latham Report 281. 317 initiation of project 57. 338±9 Leopold matrix 72 less-knowledgeable clients. 46 issue avoidance/resolution process 296. code of ethics 354±5 International Project Management Association 357 international projects concession contracts for 316 organisational structure for 234±6 investment curve 7. 33 investment decisions. 31. 290 leadership style 232 legal liability for design 255±7 legal risks 39 legislation on environmental impact assessment 63±4 on procurement procedures 212. 199 in partnering arrangements 291. 326±8. 313±14. in contract arrangements 339±40 . 276 front-end loading of project (with design engineers) 250. factors affecting 35 invitation to tender 217 invited bids. for monetising environmental costs/benefits 78±9 hierarchy of organisation 223 hospitals 325 `house of quality' 253. 195. 276 labour-intensive construction 343. 113±15 grace period 331 Greenpeace 130. 249 hard gate 248. 302 innovations. 8. 19 functional organisations 225±6 funding for projects 86 Gantt charts 139. for concession contracts 312±13. 349±51 large engineering projects 336±7 financial aspects 336 risks 336. 315 ISO standards on environmental management 81 on quality assurance 45. 250 gated design process 248 `fuzzy' gate 248. 251 functional analysis 17. in estimating 123±4 infrastructure projects 98±9. 296 induction 14 industrial projects concession contracts in 315 contracts in 335 implementing 333±40 influence curves 161 influence method 160±61 information technology (IT). 312. in prime contracts 283 interest rate 94±5 on loans 94±5 interface control 259±61 intermediate technology 347±8 internal projects 231 International Federation of Consulting Engineers (FIDIC). 249 global cost estimating method 112. valuation of 163±4 health and safety considerations 256 healthcare PFI projects 325 Heathrow Terminal 5 facility 129 hedonic methods.

for EIA information 71±2 multi-disciplinary projects 333±4 multi-project management 333±4 377 negligence. 192. PFI 328±9 overheads 109. 346±7 interest rate 94±5 repayment method 93 security for 95 local authority PFI projects 326 location±time diagrams 139. earned value analysis in 170 open tendering 327. in concession contract 310 loan stock 95±6 loans 93±7. 179. 338 network analysis 139. 180±82 offshore oil industry. for value management 23±4 opportunity to add value 9 order-of-magnitude estimates 113 organisation breakdown structure (OBS) 148. 95 Ministry of Defence (MoD) building down barriers project 281 procurement methods 264. 116 management contracts 190±92 advantages 190±91. 102. 319 materials delivered to site. 142±4 updating the network 145 worked example 143 see also precedence diagrams network methods. in concession contract 310 oil and gas industries. 269±70 organisations 222±3 building blocks 223±5 types 225±31 outline design stage 242 extra resources at 250. 315 objectives 9±11. 194±6 tender review for 213 make-or-buy decision 267 man-hours estimating 112. for procurement 327±8. 166±7 of environmental impact 73±4 mortgage 94 multi-attribute utility theory. 141 lump-sum contracts 176. valuation of 164 matrix methods for EIA information 72±3 quantified and graded matrix 73 simple interaction matrix 72 matrix organisations 227±8 maturity loan 94 maximisation of value 17. earned value analysis in 169±70 market analysis 32±3. legal definition 255±6 negotiated procedure.Index life-cycle costing 19±20 life-cycle of project 4±5. 251 output specification. 338 operational cost estimating technique 112. contracts 176. 337±8 offtake contract. 243 organisational structures 222±37 in collaborative relationships 233±4 of concession contracts 309±10 and contract types 186±93 factors affecting choice of 188 human aspects 232±3 and internal/external projects 231±2 in international projects 234±6 and purchasing/supply considerations 265±6. 102 market-led projects 316 market risks 101. 120 for design work 252 . of environmental costs and benefits 76±80 monitoring by project manager 157 in earned value analysis 165. 30 line-of-balance (LoB) charts 139. 141 loan agreement. 191±2 drawbacks 191 organisational structure for 187 manufacturing and production industries. 40 operations contract. in concession contract 310 opportunity points. 21 meet-in-the-middle design method 240 Mercedes Benz 166 mezzanine finance 91. for EIA information 70±71 network organisations 229±30 North±South Expressway (Malaysia) 311. 118±19 operational risks 39. 281±2 model conditions of contract 201±4 in EU countries 339 factors affecting selection of 203±4 monetisation.

360 with uncertainty 146±7 political influence 130 political risks 39. 344. 346 Ozal formula 308 package deal contracts 188±9 advantages 188±9 disadvantages 189 organisational structure for 187 Pareto principle. on output specifications 328±9 private-sector clients large engineering projects 336±7 and supply chain 272. 162. 120 factors affecting 109 price-based contracts advantages 196 characteristics 182. 276 SCM tools and techniques for 274 power station projects 313. 302 definitions 293±4 establishing relationship 298±300 and improvement 296 and incentives 291. 339 process capability 253 process plant projects characteristics 176 contracts for 189 estimating for 121±2 process projects 274. 319 population growth 342±3 portfolio projects 274. 142±4 advantages over arrow diagrams 142 . 296 issue avoidance in 296. 276 privatisation 322. 67±8 need for realistic 3 pre-feasibility stage. 299 partnerships 233±4. 323 precedence diagrams 139. for EIA information 70 overseas projects and environmental impact assessments 64 finance for 97. 303 making relationship work 300 mutual objectives 295±6 project-specific 294 strategic 294±5 workshops for 298±9 partnering charter 292. 292±6 benefits 300±3 compared with other procurement approaches 294 constraints to 303±5 cost savings 301. 183. seamless team 286±7 planning 137±51 of contracts 208±10 in design stages 250 in environmental management system 82±3 exercise questions 151±5 project success affected by 11 purposes 137. 184. 303±4 persistent 99% complete syndrome 169 person-level design method 241 phased. 285 core principles 283 stages 284 Prince Edward Island Bridge project 134 principal. application to supply chain 286 participants in project 246 partnering 290. for monetising environmental costs/benefits 77±8 prevention costs 51 price 107. 325±6 healthcare projects 325 and local authorities 326 objectives 324 origins 323 output specification for 328±9 prison facilities 325±6 reasons for 323±4 in UK 325±6 Private Finance Panel (PFP). 119 pre-qualification (of contractors) 211 preventative-expenditure method. 276 SCM tools and techniques for 274 overlay mapping. 185±6 disadvantages 196 tender review for 213 primary stakeholders 127±8 prime contracting 281±4.378 Index predictions of environmental impact 61. in concession contracts 309 prisons 325±6 private finance initiative (PFI) 285. VM review 24±5 preference shares 96 preliminary estimate 106. 323±9 arguments against 324 bidding and competition in 326±8 examples 323.

and contract types 186±93 project reports. 33 project finance 86±104 analysis 102 meaning of term 88±9 project functions. 165 examples 168. 32. 337 and partnering arrangements 304±5 and supply chain 272. factors affecting 109 programming 138±9 progress. 30±32 project life-cycle 4±5. 276 purchasing and supply 265±6 terminology 265 see also supply chain quality 44±57 definitions 44±5 as project objective 10. 361±2 quality audit 49 quality circles 52±3 quality control (QC) 45 quality function deployment (QFD) 253±5 quality manual 48. 278. 170 profession-led procurement systems 277. 256 productivity factor/ratio 158. 183. factors affecting 11±15 project teams 12. 338 open procedure 327. 281±2 negotiated procedure 327±8. 277 client value system 275. 215. 301 project success. 278. 33±7 project control 156±7. 30 gates in 247±8 and stakeholder management 133±4 project management definitions 3±5 function of 1 future trends 362±3 guidelines 359±62 Project Management Institute (PMI) 2. 280. 358. 280. relationship with earned value 161±2 project implementation 6±7 project initiation 57.Index procure-and-construct (PC) contract 192 procure±install±commission (PIC) contract 192 procurement compared with partnering 294 of concession contracts 311±13 EU Directive/rules on 212. 279. 162 project evaluation 37±8 project execution plan (PEP) 22±3. 279. 185. 179 management in design phases 247±55 project value chain 275. of value of work done 165 project appraisal 30. 357 project manager 12 in matrix organisations 227 in network organisations 229±30 role of 156±7. 280 promoter 12 in concession contracts 309±10 and design briefing 257±8 objectives 10. 184. 280 multi-value system 275. 281 restricted procedure 327. 180±82 project organisation. 339 Ministry of Defence's approach 264. 338 and project value chain 277. 179. 279. 49 quality plans 53 quality policy 47 quality principles 48 quality procedures 48 quality-related costs 50±52 quality systems 46±9 in design stages 253 implementation of 49±50 quantities/rates-based contracts 196±7 characteristics 182. 338 product breakdown structure (PBS) 243 product liability 45. 359 responsibilities 358 public-private partnerships 329±31 see also private finance initiative public opinion. on environmental impact 65±6 public-sector clients large engineering projects 336. 179 quality assurance (QA) 45. 326±8. 186 strengths 196 . 359 training of 14 project objectives 911. 281 user value system 275. 232±3 development of 233 specialists in 304 project triple constraints 10. 280 professional indemnity insurance 256 profit. 3. 169. 280 and procurement systems 277. 278. and software 149 project risks 7±9 379 project-specific partnering 294.

315 stakeholder analysis 127. for environmental impact assessment 73 reimbursable contracts see cost-reimbursable contracts relationships in contract management 177 and contract types 185 representation in decisions 12 research and development 6 resource cost estimating technique 112. information required for 32±3 . 178 sources 111 types 39 see also commercial risks. and software 148±9 resource scheduling 146 restrictive tendering 327. second 323 shareholder agreement. 11. 317±19 in contract management 178 design-associated 252 elemental 39. 101 risk management 39±43. legal risks. 178 risks allocation of. 338 revenue risks 39. on partnering 293. 73 screening. in concession contracts 312. 164. 318 global 39. 118±19 resource levelling 145±6 resource planning. 193±4 assessment of 33 in concession contracts 316. 39. for environmental impact assessment 60. organisational structure for 187. 338. 135 stakeholder management 131±4 and project life-cycle 133±4 stakeholders 127±36 and communications 134±5 external 128 identifying 132 information about 132 interests and influences 129±31 internal 128 mission 132±3 objectives 10 prediction of behaviour 133 primary 127±8 secondary 128±9 tender review for 213 weaknesses 196±7 quantity-proportional costs 108 questionnaire check-lists 70 Reading Construction Forum. in contract management 178 S-curves 159±60. currency exchange risks. political risks. 190 Severn Crossing. 41. in contracts 184. environmental risks. 165 examples 160. 361 separate design and implementation contracts. VM review 25 scoping. 62 seamless team 286±7 secondary stakeholders 128±9 security for loans 95 selective tendering 327. for environmental impact assessment 60±61. 65±6. 100±3. market risks. 162. implementation risks. of design work 250 scheme design. 151 integration options 149±50 for project management/planning 147±51 and resource handling 148±9 usability 150 speculative bids. operational risks. 110±11. 318 minimisation/reduction of 42. revenue risks royalty agreements 95 rule-of-thumb estimates 113 rules. 301 reference sites. in concession contract 310 Single European Market 339 social impact 130 socio-cultural factors 344 soft loan 331 software and activity modelling 147±8 analysis tools 149 for cost estimating 123±4 cost of 147.380 Index scaling check-lists 70 scaling±weighting check-lists 70 schedule performance index (SPI) 159 schedule of rates 196 schedule variance (SV) 158 scheduling. 103 and project appraisal 36±7 in projects 7±9. financial risks. 168 sanction of project.

for monetising environmental costs/benefits 79 Turnbull Report 43 turnkey contracts 188±9 see also package deal contracts turnkey procurement 281 twinning 353 two-stage tendering 206. 116±18 urgent projects 12 US Army Corps of Engineers. 276 SCM tools and techniques for 274 unit-rate estimating 112. 317. 323. Council on Environmental Quality 65 US Gulf factor (USGF) 170 utility theory. and contract types 185 timing of project 35±6 toll roads 316. 302 strategic project plan 360 strategic supply chain broker 285±6 sub-contracts 204±5 success of projects. for EIA information 71±2 . 315±16. 22 standard conditions of contract 201±4 statutory concession agreement 311 strategic partnering 294±5. as project objective 10.Index strengths and weaknesses 133 and value management 21. 331 top-down approach to management 232 top-down design method 240 total quality management (TQM) 45. 312. team-based 291±2 supply contract. 302 US Environmental Protection Agency (EPA). 352±3 tender documents 217±20 brief description of works 218 conditions of contract 217±18 contract coordination procedure 219±20 drawings and specifications 219 form of tender 220 indexes of drawings and specifications 218±19 instructions to tendering contractors 217 invitation to tender 217 programme for works 218 promoter-provided items 219 register of 216 tender evaluation 214±15 tender package approval by promoter 216 collation and issue of 221 documents included 217±20 review of 221 tender review 213±14 and contract award recommendation 215 tendering contractors instructions to 217 invitation to tender sent to 217 queries from 221 tendering procedures types 206 typical procedure 215±21 term sheet (for debt financing) 92±3 terms of contract see contract conditions time. in concession contract 310 systems diagrams. of design work 243±4 time-related costs 108 time-scales. 313±14. 322. 323 travel-cost method. 359 supply chain management (SCM) 264±89 client influences 272±5 framework for 287±8 future trends 285±7 and organisational structure 269±70 terminology 266 supply chain strategy 266±9 supply chains. 179 time management. 281 381 uncertainty management of 42±3 planning with 146 and project appraisal 36±7 unique projects 274. 53±5 advantages 54±5 and business process re-engineering 55±7 training of project manager 14 in quality system 50 Transparency International 355 transport-oriented projects 98±9. on partnering 293. for EIA information 70±71 target cost contracts 199±201 advantages 200±1 example 199. factors affecting 11±15. 200 problems in using 201 tax holidays 330±31 team building 14 team working 291±2 benefits 292 technology transfer 236. 311.

18 value of work done 163 control of 163±4 plot of expenditure against 163 . value of 163±4 work instructions 49 work packages in design stages 242 and earned value analysis 168. 28 compared with cost reduction 21 definitions 16±20 plan 20 procedure to apply 22±3 reasons for use 20±22 reviews 23±7 techniques used 27 when to use 21±2 value planning (VP) 17. partnering 298±9 World Bank 342. 163 workmanship. 305 work breakdown structure (WBS) 148. 18 value management (VM) 16±29 applications 16 benefits 22. 354 world-class organisation critical elements 270±71 and procurement 271±2 value analysis (VA) 17 value chain activities 275 see also project value chain value engineering (VE) 17. 18 value reviewing (VR) 17. quality of 361 workshops. 346. 243 work done. 303.382 Index S-curve for 162 variance at completion 158±9 virtual organisations 230±31 volume broker 286 win±win approach 296. 171 work in progress 160.

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